Introduction to Valuation Models
CHAPTER 4 TAKEAWAYS
- The valuation model for an enterprise can consist of a series of cash flows or a combination of a forecast series followed by a post-forecast series of cash flows and is modeled by the expression
- The present value of forecast period cash flows is valued by
This in expanded form becomes
- Post-forecast-period cash flows can be valued a number of ways. The model selected depends on the assumptions made about the post-forecast cash flows.
- The five models together with the associated assumptions are:
(1) Perpetual Fixed Model (PXM)
This model assumes a fixed (constant) stream of cash flow that continues forever. It's hard to think of a company's post-forecast-period cash flows that would suit this model and therefore it's seldom if ever used.
(2) Finite Fixed Model (FXM)
Unlike the perpetual fixed model this model values a fixed cash flow stream for a finite period of NX years. Again it's unlikely to be a realistic prototype ...