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DAMODARAN-ESTIMATE TERMINAL VALUE

DAMODARAN-ESTIMATE TERMINAL VALUE

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Published by PATMON
DAMODARAN-ESTIMATE TERMINAL VALUE
DAMODARAN-ESTIMATE TERMINAL VALUE

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Published by: PATMON on Apr 09, 2008
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05/08/2014

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Aswath Damodaran1
Closure in Valuation: EstimatingTerminal Value
Aswath Damodaran
 
Aswath Damodaran
Getting Closure in Valuation
n
A publicly traded firm potentially has an infinite life. The value istherefore the present value of cash flows forever.
n
Since we cannot estimate cash flows forever, we estimate cash flowsfor a “growth period” and then estimate a terminal value, to capture thevalue at the end of the period:
Value =CFt(1+r)tt=1t=
Value =CFt(1+r)t
+
Terminal Value(1+r)
N
t=1t=N
 
Aswath Damodaran
Ways of Estimating Terminal Value
Terminal Value
LiquidationValueMultiple ApproachStable GrowthModelMost usefulwhen assetsare separableandmarketableEasiest approach butmakes the valuationa relative valuationTechnically soundest,but requires that youmake judgments aboutwhen the firm will growat a stable rate which itcan sustain forever,and the excess returns(if any) that it will earnduring the period.

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