- This topic has 7 replies, 4 voices, and was last updated Apr-178:05 pm by
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Up1
Just a quick one guys, for any DDM or FCF models, there is usually a terminal value at the end where the growth is expected to be stable forever.
However, for RI’s multistage there’s no terminal value and the formula is just:
V = Book Value(@ t-1) + (RI / (1+r) …..)
Then I noticed there’s this other thing with persistence factor which looks pretty much like a terminal value.
When do we know when to include the terminal value thingy?
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Up5
hi, ‘m new here. Just trying to add something here. For residual income valuation models, we do not have TV as such. Because over a period of time, ROE equal r and RI comes to nil. To derive value of RI over a period of time till it comes to nil, we apply persistence factor based on rate at which RI decreases. TV is applicable only when value is going to grow for infinite period which is not the case here.
Correct me, if ‘m on wrong track.
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Up3
TV is basically the PV sum of all residual income in the future (the time t where this period applies doesn’t matter, the concept is future income PV-ed). So we are all prolly trying to same thing here @niravjoshi1988. I think its just terminology.
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Up2
Saw something like this without TV
Also, i thought i read somewhere that says it’s equivalent of TV is actually the BV(t-1) that you start with before all the PVs of future RIs.
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Up1
The part of the equation excluding book value is a form of TV, that has a finite n, in this case 3. Your last sentence is right.
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Up0
There is no straight-up rule – as far as I know the question should explicitly state that the company is either assumed to have stable growth or not.
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