DCF Using Perpetuity Growth-Question.
(Monkey, 31
Points)
on 6/26/12 at 4:48pm
Hello everyone,
Just wondering about the DCF in perpetuity. Should DCF using perpetuity growth net to same (close to) valuation regardless what your horizon period is since in either case, you're assuming the company will grow indefinitely? Thank you
Are you asking whether using
Are you asking whether using the Perpetuity Growth Model will yield a result similar to projecting a company's FCF for, say, 50 years instead of 5? If so, your answer is yes.
"An intellectual is a man who takes more words than necessary to tell more than he knows."
- Dwight D. Eisenhower
Check out my blog!
The further out you project
The further out you project the horizon the closer to the perpetuity value it will be. Think about something like (n+1) / n and the limit as n approaches infinity. The further out you go the closer to 1 (the value of the limit) you become.
This to all my hatin' folks seeing me getting guac right now..
It's also conceptually easy
It's also conceptually easy to think about the fact that CF at year 50 is divided by the quantity ((1+WACC)^50), so on for 49, 48, 47...
So as Crunch said, the further you project, the more negligible the present value, thus the closer the two results (Perpetuity and Raw Projection) are to one another.
"An intellectual is a man who takes more words than necessary to tell more than he knows."
- Dwight D. Eisenhower
Check out my blog!
that question makes no sense
that question makes no sense