Firm Valuation with Long-Run Business Cycles
Posted: 21 May 2019
Date Written: August 30, 2005
Pro forma analysis is often performed with the idea that a firm's cash flows are cyclic. Yet, after forecasting cash flows following a cyclic pattern, the remaining cash flows are calculated using a constant growth perpetuity calculation as a "terminal value". Such a calculation for the terminal value is inconsistent with the nature of cyclic cash flows that do not grow at a constant rate. In this paper, a method is developed for calculating the terminal value that incorporates the cyclic nature of cash flows into perpetuity. The method is easily incorporated into Excel and is very amenable to Excel's data table and "spinner" features, as well as monte carlo software packages for extensive sensitivity analysis.
Keywords: pro forma analysis, cyclic cash flows, business cycles, valuation
JEL Classification: G30, E32, E37
Suggested Citation: Suggested Citation