Perilous Forecasts: Implications of Reliance on Terminal Value

Corporate Finance Review, Vol. 14, No. 3, November-December

30 Pages Posted: 2 May 2009 Last revised: 5 Dec 2012

See all articles by Harlan D. Platt

Harlan D. Platt

Northeastern University - Finance and Insurance Area

Sebahattin Demirkan

Manhattan College - O'Malley School of Business

Marjorie Platt

Northeastern University - Accounting Group

Date Written: November 1, 2009

Abstract

We investigate the ratio of terminal value (TV) to present value (PV) for a variety of enterprises. Calculations are derived at different time periods and for various size deciles and industry. We document that when there are more years of data available that the TV/PV ratio decreases. We also document that if the size of the company increases then the TV/PV ratio decreases which is an indication of the higher cash flow of big firms in earlier years and the lowered importance of TV in their PV. We also observe different TV/PV ratios for 2-digit industry classifications. Finally, and most importantly, we document that the size of the TV/PV ratio is far greater than is commonly known. This later finding is especially important given the universal use of cash flow and valuation forecasts.

Keywords: Forecasts, Terminal Value, Market Value

JEL Classification: G30

Suggested Citation

Platt, Harlan D. and Demirkan, Sebahattin and Platt, Marjorie, Perilous Forecasts: Implications of Reliance on Terminal Value (November 1, 2009). Corporate Finance Review, Vol. 14, No. 3, November-December , Available at SSRN: https://ssrn.com/abstract=1397711

Harlan D. Platt (Contact Author)

Northeastern University - Finance and Insurance Area ( email )

Boston, MA 02115
United States
617-373-4740 (Phone)
617-373-8798 (Fax)

Sebahattin Demirkan

Manhattan College - O'Malley School of Business ( email )

Manhattan College Parkway
Riverdale, NY 10471
United States

Marjorie Platt

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States

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