CapX = depreciation is unrealistic assumption for most terminal values

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By Gilbert E. Matthews, CFA, Sutter Securities, Inc. (San Francisco, Calif., USA)

This article calls attention to a very common error made by valuation analyst. In a growing company, capital expenditures logically should exceed depreciation in most instances. Yet, many analysts assume capital expenditures equal to depreciation when calculating the terminal value, thus leading to overstatement of net cash flow and overvaluation.

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