Firm Valuation with Long-Run Business Cycles

Posted: 21 May 2019

See all articles by Tom Arnold

Tom Arnold

University of Richmond - E. Claiborne Robins School of Business

David S. North

University of Richmond - E. Claiborne Robins School of Business

Date Written: August 30, 2005

Abstract

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

Arnold, Thomas M. and North, David S., Firm Valuation with Long-Run Business Cycles (August 30, 2005). https://doi.org/10.3905/jpe.2011.2011.1.011. Available at SSRN: https://ssrn.com/abstract=1113333 or http://dx.doi.org/10.2139/ssrn.1113333

Thomas M. Arnold (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Drive
Richmond, VA 23173
United States
804-287-6399 (Phone)
804-289-8878 (Fax)

David S. North

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Drive
Richmond, VA 23173
United States

Register to save articles to
your library

Register

Paper statistics

Abstract Views
1,190
PlumX Metrics