How do I get the terminal value?
Liquidation Value: Assuming the asset liquidation companies experienced in the last year. The company will discontinue operations at some time in the future and sell the assets collected by the highest bidding price. Liquidation value can be estimated from:
a. Inflation adjustments that occur during a certain period and book value. The results based on the accounting book value and do not reflect the actual income from assets.
b. Based on asset income, estimate the expected cash flows from the asset with the application of an appropriate discount rate
Multiple Approaches: apply the multiplication of earnings, revenue and book value to estimate the value in the last year. Expected future value of the company by applying multiplication to multiply the earnings, revenue and book value to estimate the value of last year
Stable Growth Model: Assuming the company cash flow will grow at a constant rate forever. Company’s cash flow will grow at a constant rate forever. Companies can re-invest some cash flow into new assets and extend their business. If we assume that cash flow last year will grow at the rate of growth constant forever, then the terminal value can be determined by: Terminal Value t = Cash flow t+1 / (r-Stable growth). If you want to equity valuation, then the terminal value of equity can be written as follows: Terminal Value of Equity n = Cash flow to equity +1 / (Cost of equityn+1-gn).Top of Form Cash flow to equity can be determined directly as dividends or as free cash flow. If the company performs valuation terminal value can be written as follows: Terminal Value n = Free cash flow to firm n+1 / (Cost of capitaln+1-gn)
Things that need to be considered in stable growth. Is the company constrained to operate as a domestic company, or operate as a multinational company.
Is the assessment conducted in the form of nominal or real terms. What is the currency used in estimating cash flows and discount rate in valuation. Determination of growth rates of less than or equal to the rate of economic growth is not only a consistent thing to do but also ensure that the growth rate below the discount rate. This is because of the relationship between the level of risk, discount rate and the rate of economic growth. Where the risk level can be determined by: Nominal Risk Level = the level of real risk + the expected inflation rate.
Key assumptions on stable growth
The question how long the company will be able to sustain high growth may be questions that will be difficult to answer in making judgments. How long the period of high growth is influenced by three factors: Size of company, The growth rate of existing and excess return, The appeal and durability of competitive advantage
Characteristics of stable growth companies: Has a beta lower than higher corporate growth. It has a return on capital is lower Using more debt
Tend to do reinvestment lower than the company’s higher growth
Equity risk, companies with high growth rates tends to show the direction of market risk and beta risk is higher than stable growth companies.
Project Return. High-growth Company tends to have a high return on capital and equity and show the existence of excess returns. While companies with stable growth will struggle to keep the excess return.
The ratio of debt and debt costs. High-growth Company tends to use less debt than firms with stable growth. The more mature the company is increasing their capacity.
Re-investment and risk retention. Stable growth companies that tend to reinvest less than high-growth companies.