Continuing Value
(Valuing Mature Firms)
For how many years should we look into the future to obtain a meaningful firm valuation? And what happens with the firm afterwards? The module "Continuing Value" deals with these questions. It turns out that the market assumes a very long-term perspective when valuing assets. We therefore have to be able to understand the sources of long-term value and how to incorporate them in our analysis.
The module "Continuing Value" proceeds in 6 steps:
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The introductory chapter motivates the topic and shows how important it is to look beyond the, say, 5 to 7 years of explicit forecasts.
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We introduce a simple model of a growing perpetuity to estimate continuing value, and we discuss the key value drivers of that model.
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We discuss the relation between growth, investment, and value creation in the long run, and we show how these considerations affect continuing value (terminal value).
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We show how to estimate "normalized" free cash flows and how to estimate continuing value in a consistent way, given the cosiderations from the previous sections.
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We show an alternative way to estimating continuing value using multiples (relative valuation).
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Based on all these considerations, we introduce a simple procedure to value mature companies with only 5 assumptions (view tool).
For each topic, there is a short reading assignment, followed by some review questions and practice examples.