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Terminal value $0.326 / (0.11-0.08) = $4.08



One of us is miscalculating something. I've just plugged the figures into Excel and used the NPV function.
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Would this not give us TV at year 5, and subsequently require discounting back to year 0?
 
Ves said:
Are you sure? I've never done that. My thoughts are that it is a perpetuity based on a discount rate, so there's no need to discount it again.
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I feel that its a perpetuity, but its beginning 5 years from now. Hence to find what its worth now, I discount it back.

Kind of confusing and happy to be proved wrong - but I'm pretty sure this is what they taught me at uni
 
VSntchr said:
I feel that its a perpetuity, but its beginning 5 years from now. Hence to find what its worth now, I discount it back.

Kind of confusing and happy to be proved wrong - but I'm pretty sure this is what they taught me at uni
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Yeah now I'm confused too!
 
Ves said:
Are you sure? I've never done that. My thoughts are that it is a perpetuity based on a discount rate, so there's no need to discount it again.
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Yep. You've calculated a value in year x but in order to get it's value today you need to discount it by FV/(1+i)^x. Otherwise you'll get some strange results if you calculate TV in year 20 and then bring that amount undiscounted back into your NPV in today's money.

Sorry, I completely missed that earlier, my mind has been elsewhere today had a bit of a medical emergency with a family member.
 
Ok, just looking at one of my models. Seems to me I've done it this way.

However, today doing it on the fly I've forgotten the concept. At least this shows me I really don't understand the maths as well I thought I did.

Apologies guys. The dumb corner for me.
 
Ves said:
I'm getting an NPV of $5.09 using your figures.

Year 1 $0.229
Year 2 $0.256
Year 3 $0.282
Year 4 $0.305
Year 5 $0.326

Terminal value $0.326 / 0.08 = $4.08

Discount them all back to year zero and I'm getting $3.19.
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Here you go. Updated calcs. Is that what you are getting McLovin?
 

Not the dumb corner at all. Simple error. I'm just glad I found a way to help someone! I guess the phrase "there's never a dumb question" applies in this case.

Hope your relative is okay McLovin....and thankyou for expressing in such clear terms what I had in my head
 
Ves said:
Here you go. Updated calcs. Is that what you are getting McLovin?
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I got $3.43...

Discount rate 11%
Terminal growth rate 3%

TV at end year 5...



I think it's pretty funny that the three of us are getting a Finance 101 tute question wrong.
 
VSntchr said:
Not the dumb corner at all. Simple error. I'm just glad I found a way to help someone! I guess the phrase "there's never a dumb question" applies in this case.
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I wouldn't normally share my own calcs.... but trying to proof check someone else's calcs publically is always a great way to learn (and make an idiot out of yourself!).

McLovin - I'm getting 2.178 for the terminal value. Agree with everything else.

Calcs are $4.075 / (1.11)^6 = $2.178
 
Ummmm

What about the cost of growth - It's not free.

before you even start screwing up the calcs you have already made a large magnatude error.


Those sort of terminal value or DDM calcs should be based on sustainable dividends or free (after investing for growth) cash flow not earnings.
 
McLovin said:
Terminal value is derived at the end of year 5 not year 6.
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It could be at the beginning of year 6.


I'll take a look at buying back in around this level. Technical buying signal at au.stoxline website.
 
rbgmauq said:
It could be at the beginning of year 6.
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Well if it's at the beginning why would you discount it as though it's at the end of the period? There's little difference between 11:59pm and 12:00am
 
Growth per se does not add any value – only growth with a positive margin over the cost of capital adds value.

If growth was 20% it still wouldn’t add any value if the return is the same as the capital required to produce that growth. If there is no positive spread from investment over cost of capital then terminal value is the PV of earnings/discount rate.

If growth is less than the cost of capital required to produce the growth then valuation will be less than earnings/discount rate

Only if the growth provides a return greater than the cost of capital will growth add any value.

What is the return on investment generated from the 3% terminal growth?

Just plugging 3% growth into the dividend discount model without regard to the profitability will lead you astray – profitability and change in profitability is what matters in valuation
 
Sometimes a lot of business get trades at a premium and rarely cheaper
Due to its business model and reliability of earning
and using a model and stick to it you may miss out some great business

When was NVT trade cheap - All the time I hold them
It always trades at a premium even during bear market ....

People scream it expensive but market always
Price it at a premium....

So it more of an art, stock picking science play
a little part but mostly art I reckon...
 
ROE said:
When was NVT trade cheap - All the time I hold them
It always trades at a premium even during bear market .......
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On my calculations NVT is often cheap to fair very rarely expensive. I reckon a lot of inappropriate models are applied to NVT for people to come to the conclussion that its expensive.

ROE said:
So it more of an art, stock picking science play
a little part but mostly art I reckon...
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I agree with this even the best models are limited by the assumptions you make about the inputs. I call my valuation method SWAG (scientific wild **** guessing) The art is being able to make money with only a rough valuation peg to guide you - not in being able to arbitrage the difference between the market and a precise valuation. Precise is impossible when the future is unknown – that said though good valuation understanding is important in developing the art.
 
My issue with the DDM used so far in this thread is that they haven’t accounted for the cost of growth.

I can’t work out the sustainable dividend for the first 5 years because I don’t know from the information given whether the growth in EPS is from profitability change or additional investment.

But I will try and make my point on the terminal value because it is most logical that the terminal growth stems from re-investment rather than never ending profitability expansion.




Using a return of 17% the PV of the terminal cash flow is $2.05

Changing no growth measures – but simply the profitability to 11% PV of the terminal value becomes $1.81. This is the same as the PV of Earnings/discount rate – which is logical because the value of the growth is being neutralised by the cost of the capital to fund the growth.

Changing the profitability to 5% the PV of the terminal value becomes $1.00.
 
I know its a bit OT, but do you guys have a reasonable DDM spreadsheet you are prepared to share? I have downloaded a couple but they are not the best to work with! I have tried making my own but i think my excel skills are not up to it!
 
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