DCF - forecast period HELP
I am confused when people say that the forecast period is determined by the amount of time it takes for a company to reach a "steady state of growth." If I assume a 3 year forecast period for company XYZ now, it doesn't mean I actually expect that a company will grow at a constant rate to infinity 3 years from now, right? It's only a conservative assumption since I can't project FCF that far into the future.
So wouldn't it be more accurate to say the length of the forecast period really chosen based on the amount of time it takes for a company to realize any in-progress initiatives?
Well there will always be in-progress initiatives....
DCFs are models, they are not perfect, you have to make assumptions. Not really sure what your question is...
you can do it however you like - so whenever YOU think company xyz will reach a steady state of growth. as the poster above noted, DCFs are models. the approach you use to build it determines how good your model is.
Maybe I wasn't too clear with my issue.
I have just read a lot of guides that say forecast period is determined by the amount of time it takes a company to reach a steady state of growth. Fundamentally speaking, however, I think that definition is incorrect. Steady state of growth is just an assumption that we use once we have determined the forecast period. What actually determines forecast period is how long it takes a company to realize current initiatives. For a early stage growth company, this might be 10 years, as its current initiative of becoming a mature company is slowly realized. 10 years later, that very same company might have a forecast period of 3 years, as it pursues the near term goal of expanding business lines. After 3 years, it might have a forecast period of 5 years, as it aims to establish a foreign presence.
The bottom line is, although at each point in the example above we assume a steady state of growth after the forecast period in our DCF out of conservatism, this is only an assumption we make after we determine the forecast period, as opposed to a characteristic we look for to determine the forecast period.
All of that was based on personal reasoning so I was hoping someone who does this for a living could confirm or deny it.
uhhh, so you use a multistage model...? the 10 yrs would be the initial forecast period, according to your reasoning. or am i still not understanding your question.
i also really don't see the difference between your "definition" and what the "guides" state. they read virtually the same to me.
edit: are you trying to say that you think the forecast period/time to "maturity" will change as time progresses? if that's the case, then you need to alter your initial forecast period to reflect this.
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