Terminal Value for Firms with Multiple Business Units and Heterogeneous Return on Investment

40 Pages Posted: 17 Jan 2018

See all articles by Stefan Dierkes

Stefan Dierkes

Georg August Universität

Ulrich Schäfer

University of Zurich

Date Written: December 22, 2017

Abstract

Terminal values represent a large portion in the value of firms and hence should be estimated carefully. The literature on corporate valuation provides various approaches to terminal value measurement that aim at a realistic model of firm activities. However, there are only few approaches explicitly considering a firm with multiple business units, which differ in their specific return on investment. The existing approaches frequently lack a theoretical foundation. They underlie restrictive assumptions regarding payout policy and growth and have insufficiently been related to each other thus far. Based on a set of general assumptions, we illustrate how to measure a firm’s terminal value if corporate investments are made in two business units that differ in their specific return. We discuss the effect of corporate payout policy and highlight special cases that might be particularly relevant from a practical point of view or have been previously proposed in the theoretical literature. We use our general model as a reference to categorize and discuss other models of terminal value that explicitly consider investments in multiple business units.

Keywords: terminal value, corporate valuation, multiple business units, growth rates, return on investment

JEL Classification: G11, G35, M40

Suggested Citation

Dierkes, Stefan and Schäfer, Ulrich, Terminal Value for Firms with Multiple Business Units and Heterogeneous Return on Investment (December 22, 2017). Available at SSRN: https://ssrn.com/abstract=3100058 or http://dx.doi.org/10.2139/ssrn.3100058

Stefan Dierkes

Georg August Universität ( email )

Platz der Göttinger Sieben 5
Göttingen, DE 37073
Germany

Ulrich Schäfer (Contact Author)

University of Zurich ( email )

Seilergraben 53
Zürich, CH-8001
Switzerland
+41446345684 (Phone)

HOME PAGE: http://www.business.uzh.ch/de/professorships/managerialaccounting/lehrstuhl/assistierenden/us.html

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