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

Abstract

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

Cooper, Ian Anthony, Setting the Horizon Value Using DCF-Based Methods: Teaching Note (January 8, 2019). Available at SSRN: https://ssrn.com/abstract=3159030 or http://dx.doi.org/10.2139/ssrn.3159030

Ian Anthony Cooper (Contact Author)

London Business School ( email )

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United Kingdom
+44 171 262 5050 (Phone)

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