If you tinker with the number of years one discounts FCFE cash flows you get drastically different instrinsic values. For example, if I use 5 years of modeled FCFE projections then terminal value vs. 6 years of modeled FCFE projections then terminal gets drastically different intrinsic values. So my question is, how do we know which one to use and what is the economic meaning of each different projection?
Thanks!
If you’re getting drastically different intrinsic values simply by changing when you take the terminal value, there’s something seriously wrong with your model.
You have an error in one of your formulas. If the math is right, the value should be exactly the same regardless of how many years discrete projection you use.
You need to use however many years it takes to get to a stable level of long-term growth. Sounds to me like you are looking at a company with super-normal growth in year 6 and you are not adquately capturing that in your terminal value when you use only 5 years. What is your year 5 to year 6 growth? How are you calculating your terminial value?
Its been a long week. Ignorantly exluded discounting of terminal value, then I followed this up by not including apprioprate number of years to discount terminal value. Dumb mistake.
Thanks for your help guys/ladies.
How’s it look when you’ve fixed the errors?
Looks normal. Only slightly increasing since its a mega high growth company and takes several years (I model at least) to hit a terminal rate. Thanks for the help.
My pleasure.
And mine.