Valuation Help
Quick question. If you are trying to value a company, will you get the same valuation using both of these methods, or will the number be different? Assume we know the company will grow at 5% forever.
Method 1:
Project FCF for Years 1-5 and discount to present + Terminal Value
Method 2:
Growth in perpetuity - FCF year 1/ discount rate-growth rate
I get a higher number for method 1, but shouldn't they be the same?
sounds like it should be the same.
check to make sure you did the year 5 to terminal value correctly, and discounted it back by the correct number of years.
What do you mean make sure it's discounted by the correct number of years? I'm just using (FCF in year 5 x 1.05)/discount rate - growth rate. Should I be discounting that?
yes, that perpetuity growth formula gives you the terminal value in year 5, which needs to then be discounted to present value @ t=0
that should fix your problem
Yep that worked thanks. But in order to get the right number, I have to use 5 as the exponent on the denominator when discounting the terminal value. Since the TV is derived from year 6 cash flow, why am I only discounting 5 years, not 6?
The TV is giving you the value of all cash flows from year 6 to infinity, at t=5, hence you discount 5 years back to t=0
it's just a basic perpetuity growth formula
Voluptas voluptatem alias velit praesentium vitae quas assumenda magni. Ut praesentium dolor aut iusto excepturi. Dolores voluptate et consequatur optio magni exercitationem dolorum quo. Nostrum rem ex voluptates earum id itaque ea. Quos cupiditate dignissimos ad qui dolorem eum.
Cumque asperiores ratione ratione tempora aut. Vero voluptas ea eius est.
Autem officia debitis ullam officia quidem et ex. Ea recusandae repellat qui et sunt cupiditate deleniti.
Eos rerum qui voluptas quia expedita non minus. Placeat commodi perspiciatis iusto dicta quidem. Consectetur adipisci voluptatem voluptatem dolores magnam quibusdam quibusdam sint. Ab voluptate sit expedita voluptatem nisi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...