6/23/2021 Aswath Damodaran - CV - Evernote

Session 9 - Terminal Value

All good things come to an end

Closure in valuation
1. Assume that the business would be liquidated
2. Assume that the business is a going concern

3 ways

Which of these 3 should never be used?

Multiple approach : It is pricing
It's malpractice

If the company is declining or a private company's owner is growing old, it might not grow forever. eg. Bed,
Bath & Beyond/ medical practice with old doctor

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In most public companies, there is some going concern.

Growth rate cannot exceed the growth rate of the economy

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You have to cap your growth rate.

Low risk free rates are not problematic.

What one hand gives, other takes away.
Low cost of capital but growth rate in perpetuity is very low

You don't want to pay for the growth beyond 10 years. How would you capture upside!

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Brand name is one of the most sustainable competitive advantages

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You should not be worried about the growth rate but the return on capital. If your growth rate is increasing
but the cost of capital is higher than the return on capital, the value of the firm would go down.

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If debt ratio is going to be stable, any cashflow is fine. Does not make much of a difference.
If not, FCFF is better.

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Dividends are arbitrary. Use FCFE model if possible.

Levi Strauss : 1st stage America and then Asia. Then flattens out
AirBnB : Multi stage

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