1. Valuation
FIN449
Michael Dimond

2. COMPARING DCF METHODS

3. The simplest DCF assumption uses stable growth

4. The simplest DCF assumption uses stable growth

5. The simplest DCF assumption uses stable growth

6. All three methods return the same intrinsic value

7. Growth expectations change value

8. Value undefined at g=K and negative if g>K
Does the idea of supernormal growth creating negative value make sense? What does this suggest about the how the discount rate should relate to growth expectations?

9. The single-stage model is very simplistic
The stable growth assumption suggests all cash flows and related figures grow at the same rate
Extending the explicit forecast horizon allows us to show more detail (2-stage and 3-stage models)
Keeping growth equal in the explicit forecast and terminal assumption produces the same value as before. All three models still produce the same result

10. Two-stage model with stable growth

11. Two-stage model with supernormal growth
Notice the models start to return different values when assumptions are mixed

12. We could continue this to a three-stage model…

13. How much does each additional year matter?
What influence on the present value does each subsequent year have? Consider the example of a $100 annual cash flow with a 10% discount rate…
In fact, the value of the $100 CF discounted 1,000 years is practically zero:

14. Valuation needs to balance simplicity and clarity
We care more about cash flows in the immediate future than those happening later. What's going on in these cash flows?