In a typical five-year projection, the terminal value accounts for 70% of the aggregate value or more, points out Gil Matthews (Sutter Securities). That’s why you need to be aware that there are a number of pitfalls to consider, he advises. Matthews will be presenting a session on this at the ASA’s 2017 Advanced BV Conference in Houston (October 7-10).
One pitfall is the “perpetual” growth rate. The typical DCF valuation assumes that a mature company will survive and grow at a constant rate in perpetuity. But this is not a valid assumption, he says, because of corporate mortality—not all firms operate forever. Another factor to consider is decelerating company growth due to economic changes and/or obsolescence. Not considering these factors may result in an overstated value if you use a constant perpetual growth assumption. During his ASA session, Matthews will discuss these and other factors that impact terminal value and how to address them.
The agenda for the ASA conference is now available, and this year’s sessions will mix theory with practical tips you can use right away. BVWire looks forward to attending—come visit us at the BVR booth!
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