Arcadian: Cash Flow and Terminal Value
1. Prepare to explain the implications of case Exhibit 1 (Paige Simon’s first task). Based on that exhibit, is terminal value (TV) a material component of firm values?
From the exhibit, we can find the PV of five years’ dividends is small part of the market price of the stock. In my opinion, we buy a stock then get dividend periodically, which like buy a bond. The coupon payment is dividend and the face value is terminal value. The bond value is determined by the terminal value mostly. So the stock price is also determined by terminal value. The concept of going concern can explain that Terminal value is often higher than the present value of near term cash flows, which means that a company's long-term cash-flow capacity is more important.
2. Drawing on case Exhibit 4 and your own general knowledge, where would the various estimators be appropriate? Where would they be inappropriate? (Simon’s second task)
|Approach |appropriate |inappropriate |
|Book value |Depreciation (accounting) |When the book value is quite different from fair |
| | |value |
|Liquidation value |Bankrupt company (capital budgeting, cases like |Liquidation value will inappropriate for a company |
| |machines, plants, natural resources projects, which |which is doing well, because it ignores “going |
| |have definite lives) |concern” value. |
| |firms in weird market conditions | |
|Replacement Value |Fixed asset (like PP&E) |
From the exhibit, we can find the PV of five years’ dividends is small part of the market price of the stock. In my opinion, we buy a stock then get dividend periodically, which like buy a bond. The coupon payment is dividend and the face value is terminal value. The bond value is determined by the terminal value mostly. So the stock price is also determined by terminal value. The concept of going concern can explain that Terminal value is often higher than the present value of near term cash flows, which means that a company's long-term cash-flow capacity is more important.
2. Drawing on case Exhibit 4 and your own general knowledge, where would the various estimators be appropriate? Where would they be inappropriate? (Simon’s second task)
|Approach |appropriate |inappropriate |
|Book value |Depreciation (accounting) |When the book value is quite different from fair |
| | |value |
|Liquidation value |Bankrupt company (capital budgeting, cases like |Liquidation value will inappropriate for a company |
| |machines, plants, natural resources projects, which |which is doing well, because it ignores “going |
| |have definite lives) |concern” value. |
| |firms in weird market conditions | |
|Replacement Value |Fixed asset (like PP&E) |