Question

In estimating terminal value for a company or project, future growth seems to play a very important role. Why is this case? How can the future growth be determined? Besides growth-related estimations for terminal value, what other approaches might analysts use in their forecasts?

Answer 1

TERMINAL VALUE

ASSUME A COMPANY IS GROWING BEYOND A SPECIFIED PERIOD AT A SPECIFIED RATE OF RETURN.THEN THE TERMINAL VALUE IS SUM OF ALL CASH FLOWS AFTER A SPECFIED PERID AT SPECIFIED RATE OF RETURN. IT IS THE VALUE OF A COMPANY OR PROJECT BEFOND A FORECAST PERIOD.

COMMOM FORMULA USING FOR TERMINAL VALUE (DCF--DISCOUNTED CASH FLOW METHOD):

NPV: NET PRESENT VALUE / TERMINAL VALUE

F: FUTURE PAYMMENT / FUTURE CASH FLOW

N : NO OF PERIODS IN FUTURE OF ITS CASH FLOW BEYOND A FORE CAST PERIOD

R : SPECIFIED RATE OF RETURN

FROM THIS FORMULA WE CAN FIND THAT FUTURE CASH FLOWS /FUTURE GROWTH IS A MAIN PARAMETER FOR FINDING TERMINAL VALUE

OTHER APPROACHES FOR FINDING TERMINAL VALUE:

1.COMPARABLE ANALYSIS

HERE OUR COMPANY OR PROJECT IS COMPARING WITH OTHER COMPANY'S PARAMETERS OR MULTIPLES LIKE P/E RATIO, EV/EBITDA RATIO ETC

P/E: PRICE EARNING RATIO(COMPANY'S STOCK PRICE / COMPANY'S EARNING PER SHARE)

EV: ENTERPRISE VALUE

EBITDA: EARNING BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION

2. MARKET APPROACH / PRECEDENT TRANSACTIONS

HERE ANALYSIS OF TRANSACTION OF A COMPANY /PROJECT IS DONE. TRANSACTIONS MEANS EXIT OR ENTRY OF A COMPANY TO A NEW MARKET