Was asked this in an Interview..
I couldn't find it in forum search...
In a DCF valuation, what's the rule of thumb that your terminal value is to high? I said if it approaching 60 to 70% and over (as it is usually over 50%), then it's probably to high.
I think that is the correct answer, I would then maybe follow it up with some reason why the TV might be too high and how you would compensate for it.
They almost definitely didnt have a specific cutoff in mind, more just your reasoning behind whatever you said as long as it was reasonable. Im sure you were fine.
Yea i agree with Gekko on this one... you could mention how your assumptions/projections will impact TV... for example... if you only project say 2 years of flows... then terminal value will be almost all of your valuation... your answer was reasonable... if you go three levels deep on this type of question (i.e. explain that it's too high, examine potential reasons why it is too high, and finally how you could compensate for it) you'll really get good results in your interview
How exactly would you compensate for it?
buy a really, really nice car
Lol +1
the rule of thumb is if your terminal growth rate is higher than nominal gdp growth..then the company will eventually become the economy
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