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The terminal value as a percentage of firm value could be anywhere from 50-80% usually. The terminal value as a percentage of firm value could be lower or higher under specific conditions too. There is no right answer. How do you check if you are on the right track? Why is this important? What percentage of your total value does your terminal value usually represent?

Can your terminal growth rate be higher than the economy’s growth rate?

No, it is not possible for a company to grows faster than the economy as a whole forever. Since the time period we are evaluating is perpetuity, you will see that if a company grew faster than the economy did, it would become larger than the economy or at least the economy itself.

This is only possible if that company first got to 100% of their market, then expanded to other markets and captured 100% of those markets making them the entire economy..

Every valuation model is based on a variety of assumptions about the future. And assumptions about the future by nature are uncertain. How will you account for the fact? How will you account for this uncertainty? You will account for this uncertainty by doing a sensitivity analysis. Sensitivity analysis is the process how evaluating how sensitive your valuation is for changes in assumptions.

Since the DCF valuation model relies on a large number of assumptions, which are the ones you will focus on? Using Crystal Ball or @Risk or a similar software enables you to do sensitivity analysis on many variables at a time. How do you pick the top four – if you are using a data table approach to sensitivity analysis?

This page answers the question: What variables would you do a sensitivity analysis on when valuing a company using the DCF method?

Most people may agree with this statement and believe higher growth is always good. However, this is not always true! Are higher revenue growth rates always good – as in does higher revenue growth always lead to higher valuation?

This page addresses if a company with high growth rates have low valuations and why?

Most people may agree with this statement and believe higher growth is always good. However, this is not always true! Are higher revenue growth rates always good- as in does higher revenue growth always lead to higher valuation?

Excess returns can be viewed in many ways. In a DCF valuation context, excess returns are returns above the cost of capital. This article explores when a firm can earn excess returns. This page also discusses the conditions required to maintain excess returns?

Why is this important in your DCF context? This is important in a DCF context as you have to make assumptions about growth and returns in your valuation model.

The reinvestment rate measures how much a firm is plowing back to generate future growth. So clearly the reinvestment rate matters for growth. How does the reinvestment rate correlate with growth and therefore with the value of a business? We explore how the reinvestment rate impacts the value of a business in DCF valuation in this article.

How does the reinvestment rate impact the value of a business in DCF valuation?

We know that When are the sustainable growth rates and operating income growth rates are NOT always equal. There are specific conditions when are the sustainable growth rates and operating income growth rates can be equal.

This webpage discusses when are the sustainable growth rates and operating income growth rates will be equal.

Sustainable growth is the growth a company can grow at given its profitability and reinvestment decisions without taking on additional debt. The equation for sustainable growth = Retention ratio* Return on Equity. And since the retention ratio is equal to 1- Payout ratio, sustainable growth is also = (1- Payout ratio) * Return on Equity. We understand what the sustainable growth rate is and its formula.

Can I use the sustainable growth rate as my company’s revenue growth rate in the DCF valuation model?