Reference no: EM132795106
Problem 1: Over a 5-year projected forecast, you find that a company's average annual growth rate of Unlevered Free Cash Flow is 15%. In a DCF analysis, should you use a 15% perpetual growth rate to calculate the Terminal Value under the Gordon Growth Method?
A) Yes. Future growth rates are difficult to predict, and so historical results are the best estimate of future growth.
B) Yes. The Terminal Value rarely comprises a significant portion of the company's net present value, so you should not spend too much time determining the correct perpetual growth rate.
C) No. It is likely that the company's growth will slow after the forecast period, so you should use a slightly lower growth rate, such as 10%.
D) No. While future growth rates are difficult to predict, it is unreasonable to assume that a company can grow at a rate significantly higher than the overall economy forever, so a lower rate, closer to GDP growth or inflation, should be used.
E) No. With a fast-growing company, you should only calculate the Terminal Value using the multiples method
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