Read more on terminal value
| Of the three approaches, the one that
is least defensible is the use of a multiple to estimate terminal
value. Since this multiple comes from looking at how comparable
companies trade in the market, it effectively converts the discounted
cashflow valuation into a relative valuation. Liquidation value,
which in practice often becomes equated with book value, and terminal
value, which comes from assuming a stable growth rate forever,
will converge if we assume that the firm makes no excess returns
in perpetuity. If you do assume that a firm can make excess returns
in perpetuity, liquidation value will generally yield a more conservative
estimate of value than the stable growth model.
If you are valuing a private company
where you are uncomfortable assuming that the firm will be a going
concern forever, liquidation value is the more sensible choice.
If you are valuing a publicly traded company with significant competitive
advantages and potential excess returns, it is best to stick with
a going concern assumption and value the firm assuming a constant
growth rate forever.