Setting the Horizon Value Using DCF-Based Methods: Teaching Note
28 Pages Posted: 26 Apr 2018 Last revised: 10 Jan 2019
Date Written: January 8, 2019
This teaching note describes some important DCF-based formulas that are used for setting the horizon value in a corporate valuation. It shows the relationships between them and the key similarities/differences in assumptions. The formulas include the constant growth DCF formula, residual income with constant ROIC, residual income with decaying excess return, the “franchise value” method, the excess earnings growth method, and the “bank income” method. As well as being used for the horizon value for any firm, these formulas can also be used to estimate the current value of mature firms.
Keywords: Horizon Value, Discounted Cash Flow, Constant Growth, Residual Income, Franchise Value
JEL Classification: G11, G32, M41
Suggested Citation: Suggested Citation