There is no right answer. How do you check if you are on the right track? Why is this important? The terminal value as a percentage of firm value could be anywhere from 50-80% usually. The terminal value as a percentage of firm value could be lower or higher under specific conditions too. How can you check if your terminal assumptions are reasonable?
The terminal value as a percentage of firm value could be anywhere from 50-80% usually. The terminal value as a percentage of firm value could be lower or higher under specific conditions too. There is no right answer. How do you check if you are on the right track? Why is this important? What percentage of your total value does your terminal value usually represent?
Can your terminal growth rate be higher than the economy’s growth rate?
No, it is not possible for a company to grows faster than the economy as a whole forever. Since the time period we are evaluating is perpetuity, you will see that if a company grew faster than the economy did, it would become larger than the economy or at least the economy itself.
This is only possible if that company first got to 100% of their market, then expanded to other markets and captured 100% of those markets making them the entire economy..
Every valuation model is based on a variety of assumptions about the future. And assumptions about the future by nature are uncertain. How will you account for the fact? How will you account for this uncertainty? You will account for this uncertainty by doing a sensitivity analysis. Sensitivity analysis is the process how evaluating how sensitive your valuation is for changes in assumptions.
Since the DCF valuation model relies on a large number of assumptions, which are the ones you will focus on? Using Crystal Ball or @Risk or a similar software enables you to do sensitivity analysis on many variables at a time. How do you pick the top four – if you are using a data table approach to sensitivity analysis?
This page answers the question: What variables would you do a sensitivity analysis on when valuing a company using the DCF method?