Cautionary notes on determining terminal value in the DCF model

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

Terminal value:

  • Terminal value is the dominant component of most DCF valuations
  • With 5-year projections, terminal value usually accounts for 70% or more of the aggregate value
  • This presentation will examine several factors that impact terminal value and discuss how to address them
  • The final year of the projection
  • The trend toward using lower long-term growth rates
  • The “perpetual” growth rate and firm mortality
  • The use of multiples for terminal value
  • The relationship between capital expenditures and depreciation
  • The appropriate treatment of amortization

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