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| *Ostroff, Fair and Company>>>Financial Services |
How to determine the long term growth rate of EBIT for DCF analysis (terminal year)? |
When arriving at terminal year values for EBIT, how does one assume the growth rate of it? When developing the terminal year value, you assume the firm's growth has achieved a steady state. This sustainable growth rate can be calculated as the product of these four terms: P= Profit Margin = Earnings/ Revenues R= Retention Rate = [1- (dividends/share)] A= Revenues/Assets = asset turnover T= Assets/Equity = financial leverage PRAT tells you the sustainable growth rate for a company's revenues. Revenues can't grow faster than the company's return for shareholders unless it borrows money (financial leverage rises) or raises its revenues (asset turnover falls). Source(s): Analysis for Financial Management, Robert C. Higgins http://www.businesstools.org/analysis/an... A simpler form can be found below: (PAT=Return on Equity) http://www.investopedia.com/terms/s/sust... If your forecast is far enough in the future, you can assume no growth and estimate the terminal value as a perpetuity. Also if you are assuming non-linear rate of growth that converges to some level in the limit, you can incorporate that rate into the perpetuity. |
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