Computing terminal value

Business Valuation UpdateVol. 8 No. 6
June 2002

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gordon growth model, market approach, terminal value, net cash flow, earnings before interest, taxes, depreciation, amortization (EBITDA), free cash flow, invested capital, working capital

Summary

In reviewing the Cost of Capital book, page 16, we noted Dr. Pratt's comments about the error in treating EBITDA as free cash flow. We also noted that Dr. Pratt utilizes net cash flow in his discussion of the Gordon Growth Model and the Two-Stage Model shown on pages 25 to 29.