flows back into new assets and extend their lives. If we
assumethatcashflows,beyondtheterminalyear,willgrow
ataconstantrateforever,theterminalvaluecanbeestimated
as:
wherethecashflowandthediscountrateusedwilldependon
whetheryouarevaluingthefirmorvaluingtheequity.Ifwe
arevaluingtheequity,theterminal valueofequitycanbe
written as:
Thecashflowtoequitycanbedefinedstrictlyasdividends
(in the dividend discount model) or as free cash flow to
equity. If valuing a firm, the terminal value can be written as:
wherethecostofcapitalandthegrowthrateinthemodelare
sustainable forever.
Inthis section,webeginbyconsideringhowhigha stable
growthratecanbe,howtobestestimatewhenyourfirmwill
beastable-growthfirm,andwhatinputsneedtobeadjusted
as a firm approaches stable growth.
Constraints on Stable Growth
Ofalltheinputsintoadiscountedcashflowvaluationmodel,
nonecanaffectthevaluemorethanthestablegrowthrate.