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
Date Written: November 1, 2009
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: Suggested Citation