Terminal Values, Multiples, and Competitive Advantage

12 Pages Posted: 21 Oct 2008

See all articles by Robert S. Harris

Robert S. Harris

University of Virginia - Darden School of Business


This technical note provides a pedagogical overview of management communication for MBA education.



Terminal Values, Multiples, and Competitive Advantage

Any company valuation can be thought of as reflecting two attributes. The first is the profitability of investments already in place; the second is the value of future investments that may generate supernormal returns. Both components of value depend on the ability to create and sustain competitive advantages going forward.

This distinction between existing activities and future opportunities for investment has long been recognized in models of equity valuation and leads to important insights about share prices. The role of returns on future investments has not, however, received sufficient attention in many applications of discounted cash flow (DCF) methods to value corporate investments and acquisitions. A primary element of such a valuation that depends critically on sustainable competitive advantage is the estimation of any terminal value for an ongoing concern.

This note focuses on terminal value estimation with particular attention on the implicit assumptions that creep into terminal value estimates and often lead to overly optimistic assessments of value. In addition, analytical links between DCF models and multiples of cash flow, earnings, and book value are highlighted.

Company Valuation, Free Cash Flows, and Terminal Values

. . .

Keywords: communication process, communication strategy

Suggested Citation

Harris, Robert S., Terminal Values, Multiples, and Competitive Advantage. Darden Case No. UVA-F-1202, Available at SSRN: https://ssrn.com/abstract=909406

Robert S. Harris (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4823 (Phone)
434-924-4859 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/harris.htm

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