Valuation techniques

Question 1

What is the explicit forecast period?

Answer 1

The period chosen to valuate equity using discounted CF

Question 2

What is the explicit forecast period chosen to some industries?

Answer 2

2-3 –> High tech company
5-7 –> consumer goods
20-30 –> utility

Question 3

What is the terminal value?

Answer 3

The value at the date when existing business development projections will no longer have a meaning

Question 4

What is the relationship between terminal value and book value?

Answer 4

TV>BV –> it implies the company will be able to maintain forever a return on capital employed
TV < BV –> the company will enter a phase of decline after the period
TV=BV –> company’s profit = 0

Question 5

What are the advantages of the DCF?

Answer 5

• It is rigorous
• Uses only operational cash flows, which are the ones that have value for the company
• It is credited by the accounting society

Question 6

What are the disadvantages of the DCF?

Answer 6

• Difficult to estimate the precise value of medium and long-term CF
• Significant influences of supply and investment policies
• High volatility
• Difficult to identify the correct discount rate