1. Prepare to explain the implications of case Exhibit 1 (Paige Simon’s first task). Based on that exhibit, is terminal value (TV) a material component of firm values?
From the exhibit, we can find the PV of five years’ dividends is small part of the market price of the stock. In my opinion, we buy a stock then get dividend periodically, which like buy a bond. The coupon payment is dividend and the face value is terminal value. The bond value is determined by the terminal value mostly. So the stock price is also determined by terminal value. The concept of going concern can explain that Terminal value is often higher than the present value of near term cash flows, which means that a company's long-term cash-flow capacity is more…show more content… Regarding the case flow forecasts in case Exhibit 5, at what point in the future would you set the forecast horizon for the three invesmtents? Why? More generally, what should determine when you stop forecasting annual cash flows and estimate terminal value?
We calculate the growth rate is equal to 2% from the year list follow:
|Movie studio |27th year |
|Bottling plant |13th year |
|Toll road |3rd year |
A key point of judgment in valuation analysis is to set the forecast horizon at that point where stability or stable growth begins. Before the figures we listed above, the growth rate is extremely high which it is possible to sustain in the future.
There is no easy answer to the question of how far we should project the free cash flows of a firm and stop to estimate a terminal value.
Theoretically, we would prefer to forecast the individual components of revenue, expenses and investments until we have saturated market and revenue growth tracks the growth rate of the overall economy. In practice, however, few businesses survive that long without experiencing some shock due to contextual changes or competition, so long-lived cash flow projections may
