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| Free cash flows present value calculation : 3-period model |
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Around the formula...
Over three periods lasting n1 years,
n2 years, and up to infinity (for example : years 0 to 5, years 6 to
10, years 11 to infinity...), cash flow rises by g1 for n1-1
years, then by g2 for n2 years and then by g3
to infinity. Present value is then equal to:
This formula is useful when the growth rate is very high at the beginning
of the period of projection, i.e. higher than the discounting rate, and then
gradually declines.
Practically :
- The first period growth and length will depend on the company's "visibility",
i.e. the period of time over which is it reasonable to establish projections,
- During the last period, free cash flows growth rate is similar to the one
of the company's market or the economy as a whole or less,
- The second period making the transition between both periods...
See also Vernimmen chapter Chapter
16
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