I agree 100% with Professor Damodaran that when an analyst is using an EBITDA multiple in a DCF valuation, the analyst is really doing a relative valuation. Since the terminal value is typically the largest component of the DCF model, the valuation is really a relative valuation in drag, albeit one in the future. However, even if an analyst insists on using such multiples in the terminal value calculation, to be intellectually honest, the analyst should still apply the genuine DCF inputs using the applicable cash flows and the cap rate and then compare the terminal value results as a sanity check, or back into the genuine DCF inputs to determine if the terminal value obtained from the relative valuation multiple used even makes sense.
This sounds good academically but in practice is a pain in the ass to do. For example capitalizing R&D, how far back in time are you gna add back R&D expenses to assets? And at the same time, estimating the useful years for depreciating R&D is anyone's guess for a tech firm. Also what abt when next yr's R&D expenses are added on, how then will it affect the depreciation for the following year since there is an initial capitalised R&D asset, will it just be added on and depreciated by 20% again (assuming 5 year useful life)? If so the original R&D asset would only be reduced by 16% of the original year 0 capitalised R&D asset. To make this work, each year's capitalised R&D asset would have to be tracked individually and depreciated, and kept separate for this to work. So much trouble to obtain something precisely inaccurate. Wouldnt it be better if you only capitalised the R&D when a useful product or service has in fact materialised?
Hello I’m going through the business valuation concepts your videos and the material from your book. There is this picture where is the interpretation or how do I understand that please let me know. Thank you
Hi Prof, how do you estimate the Terminal Cost of Capital? More specifically, how do we arrive at an estimate of long term D/E ratio and long term country premium? thanks
Why can't we assume the company growth rate will be higher than the economy, just to be conservative? Surely many companies outperform the general economy, even over prolonged periods of time?
@@murray5938 Ok, answer this. Why would the terminal growth rate be the same of the economy? A company could grow at 0 or even lose money 15 years from now. How do we now? If someone assumed a terminal growth rate of 1% for Kodak fifty years ago, he'd have been wrong. Even worse for Lehman Brothers. I don't get it.
When a farm is sold out in Gujarat, India, the farmer demanded present market value of land from the buyer i.e. Value for Implicit Period plus the present value of crops from that land for next 100 years( Present Value of Terminal Cash Flow i.e. Value for Explicit Period. Request to Prof Damodaran to explain such valuation in detail.
The terminal value, in effect, is a capitalization valuation of the entity in the future. And the capitalization method divides the single period cash flow stream by the capitalization (or cap) rate, before discounting that result to present value. The k-g is your cap rate.
@@jamesfeldman4234 That makes so much more sense. I was wondering what the terminal value really means. Thank you so much. You saved me a lot of headache haha.
