Hi,
why do you assume a constant capital basis (i.e. Capex=D&A) from the terminal year of your projection period onwards? After all a growth rate is added to the FCF of the terminal year which then is treated as a perpetuity [FCF * (1+g) / (WACC - g)]. Wouldn't it be justifiable to assume a growing capital base in order to support this growth?
| +148 | AI Creating More Work | 44 | 1d |
| +146 | Senior Banker's Guide to IB Recruiting / Group Placement (with a Healthcare Bent) | 18 | 20h |
| +117 | Is pay at BofA really that bad? | 58 | 1d |
| +81 | Day at Macquarie | 9 | 20m |
| +44 | Is the life of a VP at a 'top-bank' really good? | 15 | 2d |
| +42 | How bad did I mess up | 10 | 2h |
| +30 | Misrepresented Houston IB | 14 | 7h |
| +29 | Law school instead of MBA for RX Banking | 6 | 21m |
| +29 | No BB RO 2026 | 10 | 1d |
| +25 | JPM SMALL CAP or WF/JEF/RBC Coverage group | 12 | 1d |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
In my opinion, It is just too hard to model assets in the long run. Sure you probably need more assets to justify growing cash flows or margins could improve.
In the long run the CapEx is more like maintenance CapEx because it's just impossible to make valid projection at that point
Try these two exercises:
Compare your perp growth rate to the company's actual historical growth rate. If you're doing it right, the former will be a fraction of the latter. Perpetuity growth usually = inflation, implying that real growth is zero. So capex should not exceed D (forget A - that's different) because that would imply you're deploying capital to investments that won't create growth
Run out your model with a more aggressive perp. growth rate. What you'll see is that this company of yours is on track to constitute about 1/3 of global GDP 50 years from now. I'm exaggerating of course, but perpetuity is a long time.
You mean the perp. growth rate should be a fraction of the actual historical growth rate, right? As you've stated it the other way around.
Good catch - since edited. Yes: The perp growth rate will be very small relative to the growth rate for the historical and near-term projected period.
Hey, what's driving this question? Are you in school? Real world sell side you want to use an income statement multiple.
Recently finished my MSc and am starting an m&a- internship in 4 weeks from now.
What are you referring to with your last sentence - calculating the final year FCF or the terminal value?
I'm saying that market practice is doing a DCF to the out years (where you have line of sight) THEN assume that a company will be worth around an industry market multiple. So in year 10 the terminal value will be EBITDA x 8 to 13 or NI x 15 o r 20. Obviously, you'll need to make sector adjustments. You're better off just going out another 10yrs than you are assuming and arbitrary rate of perpetual growth.
Et quaerat voluptatum ipsam deserunt nam necessitatibus. Laborum qui non minus maiores fuga quia. Rerum recusandae est consequatur maxime et tempore. Pariatur cupiditate iste explicabo omnis natus possimus itaque. Possimus quia quaerat sit soluta exercitationem id.
Laborum excepturi est similique laboriosam earum assumenda iste dolorum. Non tempore consequatur aut. Quis inventore consequatur ut cum earum sit iure.
Et sit fugiat magnam optio sapiente. Exercitationem aut id perspiciatis dolorum. A culpa sed sequi repellat non. Et et voluptate cumque. Quisquam enim voluptatem non aut nisi sit quidem. Ipsa delectus minus maiores vero.
Aut accusantium ut architecto beatae. At autem mollitia quasi repellendus. Tenetur aut culpa et quod. Possimus quibusdam ea adipisci. Et veritatis commodi asperiores incidunt in. Cumque nostrum praesentium sed quasi architecto.
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...