Comments on: Estimating terminal growth rates

By: naro

naro — Fri, 12 Dec 2008 02:09:42 +0000

I am doing an assignment to valuate Microsoft through having 3 different forcasted scenarios (Best, Worst, Normal) case. I calculated the WACC using 10years historical data and I got 12.11%. My problem is how to calculate the growth rate through the above different scenarios?
I calculated the average growth rate over the past 4 years and I got 20% which I feel is not logic because this means that the growth rate is less than the rate of return!!!!

Please advise!

By: Ben

Ben — Mon, 25 Aug 2008 04:30:05 +0000

Very interesting. I’ll surf you blog. Will it be continued?

By: Sam

Sam — Thu, 31 Jul 2008 10:04:52 +0000

Hi Rick,

Valuecruncher uses a perpetuity approach based on the following formula: PV(t) = FCF(t)(1+TGR)/(WACC - TGR). Applying this model to a 10 year framework results in PV(10) = FCF(10) (1 + 5%)/(WACC - 5%) where FCF(10) = FCF(9) (1 + 12%). If I was using a cap rate beyond year 10 such as a 2 times FCF multiple (arbitrary example) I would use 2 x FCF(11) where FCF(11) = FCF(10)(1 + 5%) (just take care to use the year 11 discount rate here).

Hopefully this response is not too algebraic. The Damodaran’s site (http://pages.stern.nyu.edu/~adamodar/ ) is an excellent resource not only does it have pdf versions of his text books available it also has a number of excel worksheets.

Sam

By: Rick Chai

Rick Chai — Tue, 29 Jul 2008 04:10:11 +0000

I am doing some DCF assignment right now, had a question regarding terminal growth rate, it this rate only apply for cap rates or i should apply TGR at the last year of 10 years DCF analysis, for example, the the anual growth is 12%, and terminal growth rate is 5%, is that means i should apply 5% to the last year grow of year 10, or i should apply 12% at year 10?

Thanks.