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I guess you want to forecast the profit margin for the forecast horizon?
I mean it really depends, generally one could suspected that competitive advantages for companies erode over time thus converge to industry averages. Furthermore, you do want your terminal ROE to converge to the cost of capital in the terminal value (i.e. zero value spread) therefore margins, leverage, turnover should resemble ROE = cost of capital. But I guess it really depends on the company how long it takes for this to happen, consider industry life cycles, competitive position, industry growth etc. You just do not want to overestimate competitive advantages or have a too high terminal growth rate.
COGS: Typically I would say that they are linked to sales over gross profit margin. So I reckon you should rather think about your gross profit margin rather than forecasting COGS directly. SG&A: Similar to COGS; think about EBIT margin and what's the industry average.
Just my thoughts, of course open for other suggestions.
Thanks a lot. Just realized there were some typos. Sorry. Don't think much about the details you mentioned. As you mention, ideally the ROE will approach cost of capital.
Then I have another question: Are there any solid method to calculate the risk premium in the WACC? On modeling workshops, people simply pick a number in a large range, say 3-8%. Thank you.
Well, I guess you ought to determine the expected market return using the return of a broad market index, i.e. MSCI World (as you want to resemble the market of your shareholders, as your shareholders of a large-cap are usually globally distributed, you want to pick a very broad stock index). For the risk free rate I'd just pick the yield of a high quality long-term government bond (e.g. German 10y bond yield) and expand it to infinity (as we assume going-concern in our model).
Great explanations. Thank you!
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