 # Using multiples

When using multiples and applying discounts (LOM and LOC), do we have to apply them on the multiples or on the derived equity value?

Mathematically either should be equivalent. Commutative property of multiplication.

In general, apply discounts explicitly to the equity value. It would be equivalent only if using equity multiples, otherwise not.

doesnt seem right if you use ev multiples and discount then at Wacc either multiple or ev can be discounted. If equity or equity multiple discount either at cost of equity, as long as you match the right rate to what you’re discounting should be equivalent.

I dont think he’s talking about cash flow discount rates but rather applying illiquidity/minority discounts

thanks to both of your inputs. well, to be specific, i am referring to applying discounts on the Enterprise value multiple. it wouldn’t yield to the same result if i apply discounts at the multiples or derived equity value since i still have to deduct debt, hence, it’s not pure commutative multiplication.

and yes, no cash flows assumption…

I think that you calculate enterprise value (WACC discounted from FCFF or EV multiplier), after deducting debt, common & preferred stock and adding back cash & cash equivalent to arrive at equity value.

Agree with you. But my question was if i were to use EV multiplier, should i apply the discounts on the multiplier or on the equity value. The answers given above by Mobius and BS imply that it should be applied on the equity value.

It depends, you just need to scale it appropriately and make sure if its an EV discount then you’re discounting EV and similarly.