 Technical Note: Value Driver Formulas for Continuing Value in Firm Valuation by the Discounted Cash Flow ModelL. Jennergren The Engineering Economist, 2013, vol. 58, issue 1, 59-70 Abstract: A team from McKinsey (Koller et al. 2010) recommended the value driver formula for continuing value. The idea is as follows: The company is almost in a steady state. However, the existing operations and the subsequent ones, referred to as growth projects, can be somewhat different. That is, the return on new invested capital (RONIC; refers to growth projects) can be lower than the return on invested capital (ROIC; refers to existing operations). Two weaknesses are associated with the McKinsey formula. Firstly, the only permissible case of RONIC < ROIC is where the working capital requirement is different between the growth projects and the existing operations. The usual Gordon formula then gives the same result, so the McKinsey formula is not necessary. Secondly, the implied split into existing operations and growth projects means that the former are valued under the unreasonable assumption of zero inflation. A more significant extended value driver formula is derived that rectifies these weaknesses. Date: 2013 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:taf:uteexx:v:58:y:2013:i:1:p:59-70 Ordering information: This journal article can be ordered from DOI: 10.1080/0013791X.2012.729876 Access Statistics for this article The Engineering Economist is currently edited by Sarah Ryan More articles in The Engineering Economist from Taylor & Francis Journals |
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