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Simple errors or myths in dealing with perpetuities

Author

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  • Ignacio Velez-Pareja

Abstract

Terminal value is critical for valuation purposes because very often it is a large part of what constitutes the value of a firm. In this short note I answer and clarify some typical questions and myths related to the calculation of terminal value. They are related to the use of non growing perpetuities, inflation and real growth; the use of Net Operating Profits Less Adjusted Taxes, NOPLAT as a proxy to the Free Cash Flow in perpetuity; the use of the typical textbook formula for estimating terminal value; and the treatment of working capital in perpetuities.

Suggested Citation

  • Ignacio Velez-Pareja, 2009. "Simple errors or myths in dealing with perpetuities," Proyecciones Financieras y Valoración 5679, Master Consultores.
    • Handle: RePEc:col:000463:005679
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    More about this item

    Keywords

    Terminal value; continuing value; perpetuities; firm value; equity value; cost of capital in perpetuity;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate

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