Having estimated the free cashflow produced over the 5 year forecast period, we need to come up with a reasonable idea of the value of the company's cash flows after that period. To help us do this we use, for students of Sudanese history, the easily remembered "Gordon" growth model.
Gordon Growth Model There are several ways to estimate a terminal value of cash flows, but one well-worn method is to value the company as a perpetuity. The model uses this formula:
| Terminal Value = Final Projected Year Cash Flow X (1+Long-Term Cash Flow Growth Rate) (Discount Rate – Long-Term Cash Flow Growth Rate) |
Reference
1 http://www.investopedia.com/university/dcf/dcf4.asp
2 Why use the Morningstar Ibbotson method http://www.stb.dot.gov/decisions/readingroom.nsf/WebDecisionID/39443?OpenDocument
3 Morningstar Equity Research http://www.morningstar.co.uk/uk/research/equities
No comments:
Post a Comment