Slides 1-43.pdf

Universitt zu KlnSeminar fr ABWL und Unternehmensfinanzen

Prof Dr Dieter HessCorporate Finance IIICorporate Valuation Theory

Prof. Dr. Dieter Hess

I. Company Valuation

1. Overview2. Multiples Approach3. Discounted Cash Flow Models3 scou ted Cas o ode s4. Residual Income Model5. Relation between different models and Applicability6 Application6. Application

II. Mergers & Acquisitions

7. M&A-Activities7. M&A Activities8. Explanations for M&A-Activities9. Defense tactics against hostile takeovers10 Value driver models10. Value driver models

Introduction

Course material: www.ilias.uni-koeln.de(Corporate Valuation Theory)

Password: Password:

Content: Lecture SlidesTutorials + Solutions

Previous Exams

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Schedule (1/2)

Lectures (Prof. Dr. Hess)( ) Tuesday, 12:00-13:30 & 14:00-15:30, Room XXIII 02 12 14 | 09 12 14 | 16 12 14 | 13 01 15 | 20 01 15 | 27 01 15 02.12.14 | 09.12.14 | 16.12.14 | 13.01.15 | 20.01.15 | 27.01.15

Tutorials (Niklas Blmke) Thursday, 14:00-15:30 & 16:00-17:30, Room XXV 11.12.14 | 18.12.14 | 15.01.15 | 22.01.15 | 29.01.15 | 05.02.15 Note that there will be no lecture and no tutorial in the week after the winterNote that there will be no lecture and no tutorial in the week after the winter

break. Moreover, the last lecture (03.02.15) is cancelled.

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Schedule (2/2)

Roland Bergerg TBA

Final Exam The final will take place on the 23.02.15 (Monday), 14:00-15:00

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Literature

Copeland, Thomas E./Weston, John Fr./Shastri, Kuldeep: Financial Theory and p p yCorporate Policy, 4th Edt., New York, 2005.

Ross, Stephan A./Westerfield, Randolph W./Jaffe, Jeffrey F.: Corporate Finance, 7th Edt N Y k 20057th Edt., New York, 2005.

Hess, Dieter/Homburg, Carsten/Lorenz, Michael/Sievers, Soenke: Extended Dividend Cash Flow and Residual Income Valuation Models Accounting forDividend, Cash Flow and Residual Income Valuation Models - Accounting for Deviations from Ideal Conditions, forthcoming: Contemporary Accounting Research 2011, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1145201

Koller, Tim/Goedhart, Marc/Wessels, David: Valuation: Measuring and Managing the Value of Companies, 4th Edt., New York, 2005.

Damodaran, Aswath: Domodaran on Valuation, 2nd Edt., New Jersey, 2006.

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1. Overview

I. Corporate Valuation

1. Overview2. Multiples3 Discounted Cash Flow Models3. Discounted Cash Flow Models4. Residual Income Model5. Relation between different model versions and Applicability6 A li ti6. Application

Literature: Copeland/Weston/Shastri (2005) Ch 14

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Literature: Copeland/Weston/Shastri (2005), Ch. 14Ross/Westerfield/Jaffe (2005), Ch. 17

1. Overview

Total Valuation MethodSingle Valuation Method Mixed Methods

Enterprise value is only based on ability to generate

Total value equals the value of the individual parts

Tradeoff between Single Valuation Method and Total

Cash FlowsDetermination of the

enterprise value based on expected (or current) profits

Determination of the enterprise value based on the individual assets of the enterprise

Valuation MethodValuation based on the

information gathered from Single Valuation Method andexpected (or current) profits

Normally based on performance-or Cash Flow measures

enterprise Single Valuation Method and Total Valuation process

or Cash Flow measures

Multiples Net Asset Value Method Stuttgart MethodMultiples Dividend Discount Model DCF-Models

Entit WACC APV TCF

Net Asset Value Method Under assumption of

going concern Under assumption of

Stuttgart Method Economic Value Added Residual Income Valuation

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Entity: WACC, APV, TCFEquity: FTE

Under assumption of liquidation

1. Overview

Multiples

Basic idea: A target company is valued based on the current pricing of companies with g p y p g psimilar characteristics (comparable company approach)

Example: Price Earnings Ratio stock market price (per share)P/E Example: Price Earnings Ratio

What is the fair enterprise value according the P/E ratio of the

P/E earnings (per share)

peer group? Net Income Market Cap. P/E

Company A 190 Mio. 2,166 Mrd. 11,4A 9 5

Company B 860 Mio. 6,536 Mrd. 7,6

Target Company C 50 Mio. ---- ---

Average:9,5

Enterprise value based on P/E: 50 Mio. 9,5 = 475 Mio.

Theory: Justification based on DDM (under certain conditions)

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Theory: Justification based on DDM (under certain conditions)

1. Overview

Dividend Discount Model (DDM)

Basic model in financial theoryy DDM can be interpreted as capitalized earnings method (Total Valuation) The Dividend Discount Model states that the value of an enterprise is given by the

present value of all expected future dividendspresent value of all expected future dividends

0tE DV

= Discount rate: risk-adjusted interest rate for expected future Cash Flows = cost of equity

01 (1 )tt k= +

j p q yconsidering the relevant risk ( rate of return equity holders require in the CAPM)

Common simplification: Expected dividend growth is constant

tt M 0t 0 0 0tD (1 g) 1 gE D D (1 g) EQ D(1 k) k g

9

t 1 (1 k) k g

1. Overview

Discounted Cash Flow (DCF) models

Discounted Cash Flow (DCF) models are widely applied in practice( ) y pp p DCF models belong to the group of Total Valuation Methods: The enterprise value is

given by the present value of all expected future cash flows discounted by the appropriate risk-adjusted interest rate app op ate s adjusted te est ate

0(1 )

t

t

E CFV

k

= The DCF models..

are similar to the DDM and focus on expected payoffs

01 (1 )tt k= +

are similar to the DDM and focus on expected payoffs use in contrast to the DDM different payoff definitions, i.e. (free/total/) cash flows

Equity approach: Flow to Equity (FTE) Entity approach: Weighted Cost of Capital (WACC)

Adjusted Present Value (APV)

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djusted ese t a ue ( )Total Cash Flow (TCF)

1. Overview

The most important DCF models:

tE CF In general: 01 (1 )

t

tt

E CFV

k= = +

V0 CFt kEquity approachFlow to Equity (FTE) EQM FTE cost of equity (levered)

Entity approaches:Weighted Average Cost of Capital (WACC)

TCM FCF WACC (levered)

Adjusted TCM FCF cost of equity (unlevered)Adjusted Present Value (APV)

TC FCFtax shield

cost of equity (unlevered)risk free rate

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1. Overview

Residual Income Valuation

Interesting theoretical model which is based on the idea of capital value; a simplified g p pversion in form of the EVA analysis is widely applied in practice

Idea: Idea: Market price consists of: current book value of assets capitalized excess returns

( )E RI0 0

1

( )(1 )

tt

t

E RIEQ BV

k

== + + 1t t tRI NI k BV -= - with

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1. Overview

Diverse definitions of the enterprise value

Market price of debt

Enterprise valueaggregated market price of equity and

Enterprise valueAssuming a fictive

pure equity

Market price of debt

Debtdebt financingDebt

Market price of equity

assuming partial

Market price of equity

excluding present debt financingLV EVvalue of tax savings

EQPresent value of

tax savingsPresent value of

tax savings

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TStax savingstax savings

TS

2. Multiples


1. Fundamentals2. Multiples

2 1 O i2.1. Overview2.2. Valuation based on multiples2.3. Theoretical foundation

3. Discounted Cash Flow Models4. Residual Income Models5. Relation between different model versions and Applicability5. Relation between different model versions and Applicability6. Applicability


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Literature: Copeland/Weston/Shastri (2005), Ch. 14

2.1. Overview

Idea:T t i l d b d th t i i f i ith i ilTarget company is valued based on the current pricing of companies with similarcharacteristics (comparable company approach)

Financial data which is related to the companys future profitability (or data with a stable relation to profits, Cash Flows) is primarily used

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2.1. Overview

Comparison approaches

Comparable Company Approach(usually stock market orientation)

Other comparison methods(usually no stock market orientation)

Similar Public Company MethodShare price in relation to certain key

Quantitative Orientated Methodse g valuation of a taxi companyShare price in relation to certain key

financial data of an enterprise

Recent Acquisition MethodPrices of recent public transactions in

e.g. valuation of a taxi company based on the number of taxi licenses

Sales Methode g determination of the corporatePrices of recent public transactions in

relation to certain key data of an enterprise

e.g. determination of the corporate value based on sales

(Multiples)

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2.2. Valuation based on multiples

Basic procedure:

1. Selection of a peer group:p g pPreferably many companies with similar characteristics(Especially concerning the value generating factors, e.g. profit growth, operative risk, leverage, )e e age, )

2. Calculation of certain multiples for the peer group companies:

Market valueMultipleComparison value

Calculation of the average multiple for the peer group(alternative: median, trimmed mean)

3. Application of average multiple to target company

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Market value Average multiple Comparison value


In practice multiples are based on a lot of various key figures, e.g. Profit (with different definitions)

C h Fl ( ith diff t d fi iti ) Cash Flows (with different definitions) Sales figures

Sometimes (especially in hot markets) even economically questionable figures are used e gused e.g. Number of customers, number of sold licenses, Click rate,

Furthermore, it is important to distinguish whether the applied market value ist i l (t t l l f t i EQM D btM) an enterprise value (total value of enterprise = EQM + DebtM) or

an equity value (market value of equity = EQM).

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The definition of specific multiples can vary stronglye.g. def. of earnings for PER: most recent annual earnings,

t d i f texpected earnings for current year, sum of last four quarterly earnings,earnings including/excluding extraordinary profit, ea gs c ud g/e c ud g e t ao d a y p o t,

The first step when discussing a valuation based on a multiple is to ensure

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that everyone in the discussion is using the same definition for that multiple.


Multiples based on entity value(Enterprise / Entity / Asset Value Multiples)

Multiples based on equity value(E it M lti l )(Enterprise- / Entity- / Asset-Value-Multiples)

applied market prices:

(Equity-Multiples)

Applied market values:Entity value (aggregated market price of equity and debt)non operating assets

Equity value (market capitalization)

applied reference value: non-operating assets= Enterprise value

(Market value of operating business activity)

should be related to equity (e.g. earnings, EBT, equity book value, FTE, )

Price Priceactivity) applied reference value :

should be generated by total capital, e.g. sales EBIT(DA) Operating Cash Flow However, also multiples using total capital

Equity book value / Share Earnings / Share

sales, EBIT(DA), Operating Cash Flow, based denominator and equity based numerator, e.g. EntV EntV EntV EntV

EBITDA EBIT OpFCF SalesMarket capitalization

20

Market capitalizationSales


Practical problems for the application of multiples:

(1) Extreme values / negative values( ) gMultiples are not available for companies with negative earnings and notmeaningful for companies with near-zero earnings

Solution approach: Constraining the peer groupElimination of companies with extreme / not meaningful multiples by using only values within a certain range

Problematic because the boundaries of the chosen range is arbitrary Problematic, because the boundaries of the chosen range is arbitraryBetter: Use of robust statistical techniques (e.g. median, trimmed mean, )Robust regression ( CF IV)

21


(2) Small number of peersOnly a very small number of peers is available ( very small peer group)C tl th l l t d lti l i t li blConsequently the calculated average multiple is not very reliable(single peers have a big impact on calculated multiple)

Solution approach: Inclusion of less similar enterprises and subjective adjustment of calculated multiples

Questionable because these adjustments are based on the personal Questionable, because these adjustments are based on the personal experience of the analyst

Usage of multiple regression ( CF IV) t bli h d ( d t ti ti l t l) hi h i f l ( blestablished (approved statistical tool) which is more powerful (enables

simultaneous correction of several independent variables)

22

2.3. Theoretical foundation of multiples

The value of an enterprise is regardless of the selected valuation method especially influenced by its ability to generate Cash Flows its ability to generate Cash Flows the growth rate and risk of these Cash Flows

Therefore, the selection of a certain multiple should be based on a model: - Price Earnings Ratio DDM, DCF

Price to Cash Flow Ratio DDM DCF- Price to Cash Flow Ratio DDM, DCF- Price to Sales Ratio DDM, DCF- Life-time-Customer-Value ???

(Price to customer Ratio)

The application of innovative multiples is not in general recommendedThe application of innovative multiples is not in general recommended

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Theoretical foundation of P/E ratio

P/E ratio:

tt PPER NIwith Pt market price per share

NI net income per share

DDM:

tNI NIt net income per share

0 1 1(1 ) (1 )t t tL t L tt tD p NIPk k

with Dt dividend per share

pt payout ratiopt p y

g growth rate of earnings

kL risk adjusted interest rate

24


Assuming that both dt and g are constant, we get

0

0 0 00

1 1 PER L LPg gP p NI p

k g NI k g

Hence, the P/E ratio depends on the (expected) growth rate of earnings the (expected) company risk (kL , L respectively) the (expected) payout ratio

25


Example P/E ratio

The P/E ratio represents the relationship between the current price per share and the p p p pcurrent earnings per share:

0t

PPERNI

Assuming that the company maintains a certain dividend payout ratio pt (i.e. Dt = pt NIt)

t0NI

gives the connection to the DDM:

with constant profits 0 0

1 1P p NI , PER p p

or at constant profit growth 0 t 0 tL L

1 g 1 gP p NI , PER p

0 t 0 tL LP p NI , PER pk k

profit growth 0 t 0 tL Lp , pk g k g

26


Hence, the P/E ratio primarily depends on 0 t L0

P 1 gPER pNI k g

The growth rate of the net dividend stream (~ Cash Flow to Equity, FTE), more

specifically the growth of profits in conjunction with the payout ratio, and the risk-

0

adjusted return requirement (in consideration of operational and debt risk)

A company valuation based on this multiple only makes sense if the peer group has p y p y p g pvery similar growth and risk characteristics

Caution: Even when applying an industry P/E ratio it is questionable whether theCaution: Even when applying an industry P/E ratio it is questionable whether the company is actually comparable to the industry with respect to all value-determining factors (especially: growth, distribution, operational risk, debt).

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Theoretical foundation of multiples (contd.)

P/E ratio:

0

00

1PER LP gpNI k g

Price to sales ratio:0

S b tit ti i t P/E tiNI PM S

0 0 0

0 0

Substituting into P/E ratio

1 L

NI PM S

P P gpNI S k 0 0 0

yields

LpNI pm S k g

with NI net income per share 0

00

1 LP gpm pS k g

with NIt net income per share

pmt profit margin on sales

St sales per share

28

St sales per share


Theoretical Foundation of multiples (contd.)

Price to book ratio:

0 0 0Substitute into P/E ratio NI RoE BV

0 0 00

0 0 0 0

1 1 L LP P Pg gp RoE pNI RoE BV k g BV k g

0 1

1 00

Assume (1 ) LP RoERoE g RoE p

BV k g

1Recall (1 ) and rearrange this g p RoE 1 1to RoE p RoE g

P R E 0 1

0

Price book ratio: LP RoE g

BV k gwith BVt book value of equity

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RoEt return on equity

2.4. Summary

Valuation based on multiples is widely applied in practice

Advantages:Advantages:

Multiples are easy to apply and deliver quick resultsMultiples require only few and easily available data (market prices and companyMultiples require only few and easily available data (market prices and company data are usually easy to find), the calculation is less complex compared to other valuation methods

Easy to understand and to communicate Easy to understand and to communicateConcept is (seemingly) easy to understand for clients, pressand by comparison easy to communicate

Close to market valuationValuation based on current market prices reflecting how the market prices similar assetsassets

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2.4. Summary

Disadvantages / error sources:

It is important to have a precise definition of the multiplep p pMultiples with identical names can be defined differently

Multiples represent rudimentary application of statistical proceduresP d bl t i l li i ( ti ti bl lProcedure comparable to simple linear regression (sometimes questionable sample selection); consistent application of regression analysis is advantageous

Difficult to select appropriate peers, i.e. truly comparable firmsespecially if peers differ regarding value generating factors (growth, risk)

One-dimensionally comparisonValuation is based on one single corporate key financialValuation is based on one single corporate key financial (e.g. EBIT or sales)

Relative valuation with multiples is problematically if the market or peer group is l d h lovervalued as a whole

Self-reinforcing effect in hot markets

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3. Discounted Cash Flow Models


1. Fundamentals2. Multiples3 Di t d C h Fl M d l3. Discounted Cash Flow Models

3.1. Key elements of valuation3.1.1. Determination of the relevant Cash Flow3.1.2. Determination of the cost of capital

3.2. DCF-versions3.3. Circularity problem

4. Residual Income Model5. Relation between different model versions and Applicability6 Applicability6. Applicability


32

Literature: Copeland/Weston/Shastri (2005), Ch. 15Ross/Westerfield/Jaffe, (2005), Ch. 17 Damodaran (2002), Ch. 17, 18, 19

3.1. Key elements of Valuation

The basic form for all valuation models is the present value:

Present value: ( )0

1 (1 )

t

tt

E XV

k

== +

Inputs:

1 ( )t= +

1. Estimating the expected, uncertain "payment flow" (or a different income figure) of a company Xt

2. Determination of the relevant risk-adjusted rate of return k the investors requirej q

Caution: The numbers in numerator and denominator have to fit together

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3.1.1. Determination of the relevant Cash Flow

Cash Flow forecasts

To forecast future Cash Flows (for DCF models), earnings, different methods are ( ) gused (long-term) financial planning models

Planbilanz 20X1Anlagevermgen Eigenkapital

Gebude XX Grundkapital XXXAnlagen XXXX Rcklagen XXX

Umlaufvermgen FremdkapitalVorrte XXX Verb. L&L XXXLiquide Mittel XX Langfr. Verb. XXXX

Planbilanz 20X2Anlagevermgen Eigenkapital



Bilanz 20X0Anlagevermgen Eigenkapital



. . .

Material XX Umsatz XXXXLhne XX Sonst. Ertrge X Abschreibungen XXXJ XX

XXXX XXXX

Plan-GuV 20X1XXXX XXXX


Plan-GuV 20X2XXXX XXXX


GuV 20X0 . . .

XXXX XXXX

erwart. Cash Flow 20X1

XXXX XXXX

erw. Cash Flow 20X2

XXXX XXXX

Cash Flow 20X0 . . . Value driver models Econometric models(e.g. time series analysis)

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Deposits and payments can be forecasted using time series analysis models

Ongoing deposits in period tg g p p ongoing payments in period t= Cash Flow of period t

alternatively their single components can be forecasted separately (e.g. sales, personnel-, material cost, , tax payments, )

Problem: Common components/ trends in single time series

35


Common developments of single time series are being captured ideally by financial planning models; that is, by considering relations resulting from financial reporting

Consistent Cash Flow forecasts can be derived based on projected balance sheets and projected income statements

To do so, Cash Flow schemes are used. A simplified scheme for indirect Cash Flow calculation can be found on the next slide:

36


Indirect Cash Flow scheme (simplified)

Net IncomeNet Income+ actually paid interest (a)+ actually paid taxes= Earnings before interest and taxes (EBIT)

tax on EBIT (theoretical tax at 100% equity-financing)+ depreciation and other non cash expenditures (b)+ depreciation and other non-cash expenditures (b) Investments in tangible/intangible assets and WC (c),(d)= Free Cash Flow (FCF)

Gross Cash Flow (theoretical 100% equity-financing)

+ tax savings due to debt-deductible interest

= Total Cash Flow (TCF)

( q y g)

Gross Cash Flow (considers actual debt financing)

interest and debt repurchases/debt issuance

= Flow to Equity (FTE) Net Cash Flow(considers actual debt financing)

37


Comments on selected items of the Cash Flow scheme

(a) Cost of Debt:( ) only explicit interest; it is sometimes proposed to take implicit interest into account

(b) non-cash expenditures:D i ti (i t t t) Depreciation (income statement)

Additions to provisions (change in balance sheet, explanation of inc. statement)non-cash income: Attributions (income statement) Release of provisions (change in balance sheet, explanation of inc. statement)

(c) Investment payouts: Investments in financial and fixed assets Investments in intangible assetsInvestments in intangible assets

(d) Decrease/increase in working capital [including cash] Inventories + accounts receivables + securities [+ cash] + advance payments -

t i d t bl

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payments received - accounts payables


Annotation on the term Investment in the context of cash flow determination

Net investment exclusively includes expansion- or new investmentsy p

Gross investment includeR l t i t t ( di t th d i ti t ) d Replacement investments (according to the depreciation amounts) and

Expansion- or new investments (=net investment)

Definition: Gross investment = net investment + depreciation

By using perpetual annuities it is assumed that net investment = 0. Therefore, replacement investment equals depreciation

39


Detailed indirect Cash Flow scheme (DRS 2)

1. Result of the period (including earnings share of minority interests) before extraordinary items (Net income +/- extraordinary expenses/income)

2. +/- Depreciation and amortization of fixed assets

3. +/- Increase / decrease in provisions

4. +/- Other non-cash expenses / income (e.g. depreciation on an activated discount)

5. -/+ Profit/loss on disposal of fixed assets

6. -/+ Increase / decrease in inventories, accounts receivables and other assets not assignable to investing or financing activities

7. +/- Increase / decrease in accounts payables and other liabilities not attributable to investing or financing activitiesg

8. +/- Payments from extraordinary items

9. = Cash Flow from operating activities

40


10.,12.,14. Proceeds from disposal of tangible fixed assets, intangible assets, financial assets

Detailed indirect Cash Flow scheme (continued)

11.,13.,15.

- Payments for investments in tangible fixed assets, intangible assets, financial assets

16. + Proceeds from the sale of consolidated companies and other business units

17. - Payments for the acquisition of consolidated companies and other business units

18. + Proceeds from financial assets as part of short-term financial planning

19 Payments for financial investments as part of short term financial planning19. - Payments for financial investments as part of short-term financial planning

20. = Cash Flow from investing activities21. Proceeds from allocations to equity (capital increases, sale of treasury shares, etc.)

22. - Payments to company owners and minority shareholders (dividends, purchase of treasury shares, equity repayments, other payouts)

23. + Proceeds from issuance of bonds and of (financial) loans

24. - Payments of loans and (financial) loans

25. = Cash Flow from financing acticities26. Change in cash funds from cash-relevant transactions (sum of figures 9, 20, 25)

41


Determination of FCF, FTE on basis of DRS 2 Cash Flow calculation

Cash Flow from operating activities DRS 2, Pos. 9,+ paid interest (to the extent shown in the operating activites)+ paid taxes= Operating cash flow before interest and taxes Operating cash flow before interest and taxes+ Cash Flow from investing activities DRS 2, Pos. 20- theoretical tax charge at 100% equity-financing (EBIT sK)+/ decrease/increase liquid funds DRS 2 Pos 26+/- decrease/increase liquid funds DRS 2, Pos. 26= Free Cash Flow (FCFt)

+ tax savings of pro rata debt= Total Cash Flow (TCFt)

- paid interest

+ Proceeds from issuance of bonds and of (financial) loans DRS 2 Pos 23+ Proceeds from issuance of bonds and of (financial) loans DRS 2, Pos. 23- Payments of loans and (financial) loans DRS 2, Pos. 24= Flow to Equity (FTEt) = Net Cash Flow (NCFt)

42


Phase models

Key question: How to predict cash flows for an infinite planning horizon?y q p p g Simplification: Breakdown of the forecast horizon in 2 (or more) periods (phases)

Phase 1: Detailed phaseExpected Cash Flows for seperate periods

Phase 2: Terminal Value phaseExpectation: sustainable Cash Flow growthp p p p g

. . .

1 2 3 4 5

Estimation of a balanced (sustainable) growth rate of the Cash Flows (eternally

Individual forecasts of cash flows for the next n periods (e g financial

86 7

growth rate of the Cash Flows (eternally growing or constant perpetual annuity)

for the next n periods (e.g. financial planning)

43


Value contribution of the different phases:

01 1

(1 )

(1 ) (1 )

T t Tt Tt t

t t T

CF CF gV

k k

-

+

+= ++ + 1 1

1 1

(1 ) (1 )

(1 )1

(1 ) (1 ) (1 )

t t T

T tt Tt T t

t t

k k

CF CF g

k k k

= = +

+ ++= ++ + + 1 1(1 ) (1 ) (1 )

1 1

(1 ) (1 )

t t

Tt

Tt T

k k k

CF gCF

k gk k

= =+ + ++= + -+ +1 (1 ) (1 )t k gk k= + +

Value contribution of theValue contribution of the Value contribution of theTerminal Value phase

a ue co bu o o edetailed planning phase

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"Terminal Value problem:

The length of the detailed phase determines the relative value contribution of the g pindividual phases

The shorter the first phase: The shorter the first phase: the smaller the contribution of the detailed planning phase to the corporate value the higher the contribution of the terminal value phase which is based on imprecise

growth assumptions

Detailed phase usually 3 5 years; Detailed phase, usually 3-5 years; most of the companys value is based on the Terminal Value (often 80-90%, depending on g and k)

45


Terminal Value is very sensitive with respect to the growth assumption

E l CF 1 k 10%Example: CFT = 1, k = 10%

g should reflect the long-term growth rate of the economy (or industry sector)

46

g s ou d e ect t e o g te g o t ate o t e eco o y (o dust y secto )

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