Terminal Value Flashcards
What is terminal value?
Estimated value of co beyond final year of explicit forecast period of DCF
CFGR and DR stay the same
How do you calculate the Terminal Value?
- gordon growth method
- multiples method
For the gordon growth method- what should the terminal UFCF GR be?
- should be below GDP of country
- dev markets usually 1-3%
Why terminal UFCF GR so low?
growth always slows over time
How does terminal UFCF GR differ from UFCF GR at end of forecast period?
close
What is the formula for the multiples method?
Final Year EBITDA x Exit multiple
What is the exit multiple?
TEV (Terminal Value) / EBITDA (final forecast year)
use gordon growth to find TV
How do you derive the exit mult?
- comparable companies
- sometimes apply discount b/c mults tend to decrease over time
How do you get UFCF ot Y1 of terminal period?
- project UFCF 1yr aft explicit forecast period
- last UFCF x (1 + Terminal UFCF GR)
You’ve found TV. Now what?
- PV TV + PV UFCF = implied TEV
- implied EqV = Implied TEV + NOA - L&E items not from CS investors
- Implied share price = Implied EqV / diluted share count
What do you check for?
- terminal FCF GR
- Terminal Mult
How do you check if terminal FCF GR is correct?
- Get from both mtds and compare.
- Is it low enough? Has to be lower than GDP.
How do you check if terminal mult (exit mult) is ok?
- pump into mults mtd
- how does it compare to median terminal mult of comps and current mult of co? should be in the middle
Which mults to use for multiples method? Public comps or precedent transactions?
public comps, ideally 1-2 years in future
b/c don’t have control premium
Why discount TV to PV?
- TV represents value at a pt in future
- valuation tells you what co is worth today so gotta discount
What year do you use to discount the TV to PV?
the final year of the final forecast period
Why use final year of forecast period to discount TV to PV? Shouldnt u use 1st year of TV?
Nope
- TV is PV of cash flows starting in TV
- but it’s the PV as of the end of the explicit forecast period
Do you include unexercised options in DCF?
No. Small impact, tricky, not worth effort
What is a more intuitive way to think about Gordon Growth formula?
Terminal Value = FCF in Year 1 of Terminal Period / (Discount Rate – Terminal FCF Growth Rate)
What does the intuitive Gordon Growth formula mean?
- co is worth less if the Discount Rate is higher and worth more if the Terminal FCF
Growth Rate is higher. - The company is worth more when you have worse investment options elsewhere and worth less when you have better investment options elsewhere.
Problem using TEV/EBITDA to calc TV?
- ignores Capex. 2 cos w similar TEV/EBITDA mults might hv v diff fcf and fcf growth figures -> implied values v diff
Makes sense to use -ve Terminal FCF GR?
- expectation that co will stop generating CF eventually
- company isn’t worthless- just worth less
What is an example of -ve Terminal FCF GR?
eg. biotech or pharma co and patent on key drug expires during explicit forecast period
- equals lost rev -? declining cash flow
What assumptions to analyze in sensitivity table for DCF?
- things that make big impact in DCF- DR< Terminal FCF GR, Terminal Mult, key operational drivers that affect revenue growth, patent expiration on drugs if in pharma
What is the most volatile part about DCF?
aka slight changes to what lead to large changes in NPV?
- WACC
If DCF projection is short and use exit multiple, exit mult will be more volatile than WACC
What has more positive influence on terminal growth value in DCF- 1% decrease in DR or 1% increase in terminal growth rate?
- increase in terminal growth rate
- gordon growth formula
How do you check TV if it’s accurate?
- pick a TEV/EBITDA terminal mult.
Use DR, plug into gordon growth rate to find Terminal FCF Growth rate
Is GR too high?
