What are the basic requirements of building a DCF model? We discuss the Essential Ingredients of a DCF Valuation Model on this page.
In today’s technology and internet-enabled world, some rapidly growing companies grow at unearthly rates of 50%, 100% and even 200% a year during the first few years. These tremendous growth rates are not sustainable for long periods. These high growth rates usually drop off in a few years and reach more earthly rates of 10%, 15%, 20%, or even 30% which are still fantastic growth rates for most companies. Eventually, even these companies become mature, face competition and encounter obstacles, and over time slow down to grow at historical rates.
What are Three-Stage or Multi-Stage Models?
A company is incorporated as per the corporate laws of the land. When incorporated, it becomes a separate legal entity by itself and continues to function as a separate legal entity unless it is intentionally shut down in accordance with the corporate laws of the land. Since the company is a separate entity and lives on until it is shut down, it theoretically has an infinite lifespan. The owners and managers of the company may come and go but the company theoretically can live forever. How many years do we need to forecast financials?
We address these questions here; “What is the Lifetime of a Business? How many years do we need to forecast financials?
Illiquid assets are often sold at a discount compared to comparable liquid assets when estimating value using multiples of revenues or cash flows or earnings. Studies show a 35% discount for illiquid assets (Maher 1976). How can you compute the liquidity discount- the penalty for not being a liquid asset?
On this page, we address the question: “How is the liquidity discount arrived at?”