Simple errors or myths in dealing with perpetuities

Ignacio Velez-Pareja ()

No 5679, Proyecciones Financieras y Valoración from Master Consultores

Abstract: Terminal value is critical for valuation purposes because very often it is a large part of what constitutes the value of a firm. In this short note I answer and clarify some typical questions and myths related to the calculation of terminal value. They are related to the use of non growing perpetuities, inflation and real growth; the use of Net Operating Profits Less Adjusted Taxes, NOPLAT as a proxy to the Free Cash Flow in perpetuity; the use of the typical textbook formula for estimating terminal value; and the treatment of working capital in perpetuities.

Keywords: Terminal value; continuing value; perpetuities; firm value; equity value; cost of capital in perpetuity (search for similar items in EconPapers)
JEL-codes: D61 G31 H43 (search for similar items in EconPapers)
Pages: 9
Date: 2009-06-23
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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:005679

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