So having all this free time on my hands with studying done, I want to complete some real financial models in my spare time! When I went through my Level 2 equity book and tried to apply it to a financial statement I think I had a mild panic attack! I’m trying to do a DDM and as such need the below inouts
- Recent dividend
- Required return
- Long term growth rate
- Terminal share price
My noob questions are…how does one normally approximate a terminal share price based to use in the model? Do I need anything for a dividend discount model? I know this sounds wild given I have passed the exams but I’m honestly at a loss!
Aswath Damodaran at NYU has a lot of videos on his site covering this and other topics, I’d recommend checking that out.
Very simplistically, the two ways that come to my mind are: (1) you can make an assumption that your particular measure of cash flow will grow into perpetuity at a constant rate beginning at some future date (e.g., 10 years from now) and then use something like the Gordon growth model (which essentially computes the sum of an infinite stream of cash flows discounted to today) to compute your terminal value; and (2), I’ve seen others use some price multiple based on earnings, FCF, etc. to estimate terminal value.
Disclaimer: I’m the furthest thing from an expert in any of this. I don’t think you can go wrong sifting through Aswath’s materials though.