Simple Errors or Myths in Dealing with Perpetuities

9 Pages Posted: 18 Jun 2009

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: June 17, 2009

Abstract

Terminal value is critical for valuation purposes because very often it is a large part of what constitutes the value of a firm. In this short note I answer and clarify some typical questions and myths related to the calculation of terminal value. They are related to the use of non growing perpetuities, inflation and real growth; the use of Net Operating Profits Less Adjusted Taxes, NOPLAT as a proxy to the Free Cash Flow in perpetuity; the use of the typical textbook formula for estimating terminal value; and the treatment of working capital in perpetuities.

Keywords: Terminal value, continuing value, perpetuities, firm value, equity value, cost of capital in perpetuity

JEL Classification: D61, G31, H43

Suggested Citation

Velez-Pareja, Ignacio, Simple Errors or Myths in Dealing with Perpetuities (June 17, 2009). Available at SSRN: https://ssrn.com/abstract=1421344 or http://dx.doi.org/10.2139/ssrn.1421344

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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