Terminal Value Flashcards

1
Q

Long term growth rate

A

expected real interest rate = LT bond yield

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2
Q

Retention ratio

A

Expected growth rate/Return on equity

Therefore:Expected Growth Rate=Retention RatioX ROE

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3
Q

Equity reinvestment rate(FCFE)

A

Expected growth rate/Return on equity

Therefore:Expected growth Rate=Equity Reinvestment X ROE

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4
Q

Reinvestment Rate in stable growth (FCFF)

A

Stable growth rate/ Stable period Return on capital

Therefore Expected growth rate = Reinvestment Rate X ROC

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5
Q

Terminal valuen

A

Free cash flow to firm n+1 /(Cost of capitaln+1−gn)

gn=Reinvestment rate X return on capital

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6
Q

TV for FCFE

A

EBIT (1-t) (1- g/ROE)/ (Cost of equity –g)

g-Expected growth rate

ROE-Return on Equity

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7
Q

TV for FCFF

A

EBIT (1-t) (1- g/ROC)/ (Cost of capital –g)

g-Stable growth rate

ROC-Stable period of ROC

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8
Q

Liquidation Value Approach

A

Book Value of Asset X (1+inflation)average life of assets

Note: BV may not be accurate hence use Cashflow after tax cashflow

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9
Q

Terminal Value ROC=WACC

A

EBIT n+1(1-T)Cost of Capital n

Use this when WACC=ROC means you assume company has no comparable advantage in long run.

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10
Q

3 Factors to consider when looking at growth rate

A
  1. Size of the firm
  2. Existing Growth Rate
  3. Magnitude and sustainability of competitive advantages
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11
Q

What factor contribute to excess return over long period?

A

STRONG BRAND NAME

Think P&G

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12
Q

Adjusted Value for Survival (For younger and small firms)

A

Adjusted value =Discounted cash flow value(1−Probability of distress) +Distressed sale value(Probability of distress)

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13
Q

Cash burn ratio(measure of potential cashflow problem)

A

Cash balance/EBITDA

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