Your Company Is Worth As Much As Somebody Else Is Willing to Pay For It

Terminal Value Calculation

Once you have projected the free cash-flows or dividends for the forecast period, you need to calculate the terminal value of the company. One approach is to use the Gordon growth formula, assuming that the free-cash flows or dividends will continue growing to eternity at a constant growth rate. The other approach employs some market valuation multiple to estimate the selling value of the company after the forecast period. The terminal value will also have to be discounted to its present value.

Gordon Growth Formula

Terminal Value = (Last Year's Projected FCF x (1 + Perpetual Growth Rate in FCF))/(Last Year's Discount Rate – Perpetual Growth Rate in FCF)

here you can replace FCF with dividend and perpetual growth rate in FCF with perpetual growth rate in dividend for DDM

Exit Value

As mentioned earlier the second option is to estimate the exit value applying some market multiple that best characterizes the given sector such EV/EBIDA, P/E or P/CE, etc. The assumption is that you can sell the company at the end of the forecast period for the price corresponding to the given multiple. You can use different valuation metrics to determine the exit value and compare results or calculate a weighted average from using different multiples.

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