Final answer:
Basing terminal multiples on what public company comps are trading at can be flawed because it assumes the market always values comparable companies correctly, which may not be the case. This can lead to incorrect valuations and misinterpretation of terminal multiples. Other factors like industry dynamics, growth prospects, and financial performance should also be considered.
Step-by-step explanation:
A flaw with basing terminal multiples on what public company comps are trading at is that it assumes that the market is always correctly valuing the comparable companies. However, the market's perception of a company's value can be influenced by various factors like investor sentiment, market trends, and speculation, which may not accurately reflect the intrinsic value of the company. This can lead to incorrect valuations and misinterpretation of the terminal multiples.
For example, if a comparable company is currently trading at a high multiple due to market exuberance or speculation, basing the terminal multiple on that value would overestimate the value of the target company. Similarly, if a comparable company is undervalued due to negative sentiment or temporary challenges, basing the terminal multiple on that value would underestimate the value of the target company.
Therefore, it is important to use caution when relying solely on public company comps for determining terminal multiples and consider other factors like the target company's specific industry dynamics, growth prospects, and financial performance.