Answer 9 |
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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. |
