What is the Terminal Growth Rate? The terminal growth rate is the constant rate at which a firm’s expected free cash flows are assumed to grow indefinitely. This growth rate is used beyond the forecast period in a discounted cash flow model, from the end of the forecasting period in perpetuity, we will assume that…
What is Economic Value Added (EVA)? Economic Value Added (EVA), sometimes known as Economic Profit, is a measure based on the Residual Income technique, which measures the return generated over and above investors’ required rate of return (hurdle rate). EVA serves as an indicator of the profitability of projects in which a company invests. Its…
What is the Arbitrage Pricing Theory? The Arbitrage Pricing Theory (APT) is a theory of asset pricing that holds that an asset’s returns can be forecasted with the linear relationship of an asset’s expected returns and the macroeconomic factors that affect the asset’s risk. The theory was created in 1976 by American economist, Stephen Ross….
What is EV/EBITDA? EV/EBITDA is a ratio that compares a company’s Enterprise Value (EV) to its Earnings Before Interest, Taxes, Depreciation & Amortization (EBITDA). The EV/EBITDA ratio is commonly used as a valuation metric to compare the relative value of different businesses. In this guide, we will break down the EV/EBTIDA multiple into its various…
Stable Growth vs. 2-Stage Valuation Model In valuation, we can find useful insights by comparing theories embedded in different valuation models at our disposal. In preparing a valuation model, however, an important insight becomes apparent. When we are attempting to forecast the future cash flows of a company, a trade-off exists between the complexity of…
What is Synergy Valuation? When a company acquires another business, it is often justified by the argument that the investment will create synergies. The primary source of synergy in an acquisition is in the presumption that the target firm controls a specialized resource that becomes more valuable if combined with the acquiring firm’s resources. There…
What is Equity Risk Premium? Equity Risk Premium is defined as the excess return that investing in equities provides over a risk-free rate. The variable is a central component in almost every risk-reward model used in finance today, but the way that it is measured may not be appropriate for forward-looking analysis. This guide will…
FCFF vs. FCFE Reconciliation Template Free Cash Flow to the Firm (FCFF) is the cash flow available to all the firm’s suppliers of capital once the firm pays all operating and investing expenditures needed to sustain the firm’s existence. Operating expenditures include the fixed and variable costs, inputs required by a company to generate its…
What is Precedent Transaction Analysis? Precedent transaction analysis is a method of company valuation where past M&A transactions are used to value a comparable business today. Commonly referred to as “precedents,” this method of valuation is common when trying to value an entire business as part of a merger/acquisition and is commonly prepared by analysts…
What is Enterprise Value (EV)? Enterprise Value (EV) is the measure of a company’s total value. It looks at the entire market value rather than just the equity value, so all ownership interests and asset claims from both debt and equity are included. EV can be thought of as the effective cost of buying a…
