Terminal Value for Firms with Multiple Business Units and Heterogeneous Return on Investment
40 Pages Posted: 17 Jan 2018
Date Written: December 22, 2017
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: Suggested Citation