In a DCF, how do you determine whether to do a 5 or 10 year forecast?
I received this question recently and wondered if I answered correctly.
For a media company, for example, should it be a 5 or 10 year forecast and what determines it?
I know that the shorter the years, the more value in the terminal value. But in what instances is it better to have more of your assumptions lie in the terminal value ?
Not sure about specifically media, but usually if a company has stable cash flows 5 years is good. If the company is growing quickly or does not have stable cash flows 10 years is best so that your last few years end in stability.
its whatever your md tells you
You want to make sure revenue growth % has leveled out at a lower number by the time you calculate TV, so if the revenue growth is really high at the beginning of projections you may need to model out more years for a better revenue glide path. Going into TV with a growth rate that is too high will overstate the TV and affect your valuation.
You want to achieve a level of maturity/stability within your projection period. Often cannot do that with just 5 years
In general: if the target itself AND ITS MARKET is stable, you can stop the explicit forecast. If the market or your share is growing, keep forecasting. If the company is highly profitable and barriers to entry are not huge, keep forecasting and implement the impact of increasing competition (marketing spend, capex, marings, etc).
Short cut: use a multi stage terminal value based on value driver method instead of gordon growth.
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