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The terminal value is calculated in accordance with a stream of projected future free cash flows in discounted cash flow analysis. For whole-company valuation purposes, there are two methodologies used to calculate the Terminal Value. [1]
Valuation using discounted cash flows (DCF valuation) is a method of estimating the current value of a company based on projected future cash flows adjusted for the time value of money. [1] The cash flows are made up of those within the “explicit” forecast period , together with a continuing or terminal value that represents the cash flow ...
The discounted cash flow (DCF) analysis, in financial analysis, is a method used to value a security, project, company, or asset, that incorporates the time value of money. Discounted cash flow analysis is widely used in investment finance, real estate development, corporate financial management, and patent valuation. Used in industry as early ...
Today we will run through one way of estimating the intrinsic value of InterContinental Hotels Group PLC (LON:IHG) by...
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Next, a divestment price - i.e. a Terminal value - is modelled by assuming an exit multiple consistent with the scenario in question. (The divestment may take various forms.) The cash flows and exit price are then discounted using the investor’s required return, and the sum of these is the value of the business under the scenario in question.
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Cash flows after the forecast period are represented by a fixed number - the "terminal value" - determined using assumptions relating to the sustainable compound annual growth rate or exit multiple. There are no fixed rules for determining the duration of the forecast period.