Question: Write me a paragraph between (teacher is asking me to use less than one hundred words) to explain the concept of "PV of horizon value" and how is it calculated using words and numbers.
But having a hard time with so few words. Here is what I have so far.... (any suggestions how to make it more concise?)
The Horizontal value represents the future date beyond which more precise cash flows projection are not possible. Horizontal value is further discounted to find its present value at time 0.
Page 322 of our text book describes Horizon value as follows:
- "The horizon value of operations is the value of operations at the end of the explicit forecast period. It is also called the terminal value or continuing value, and it is equal to the present value of all free cash flows beyond the forecast t period, discounted back to the end of the forecast period at the weighted average cost of capital"
We determine the value of a business at horizon. A business is often assumed to be either stable going, steadily growing, or in decline.
- Stable (no growth) future: use perpetuity formula
PVH at horizon = (CFH+1)/r
Horizon Value
- Constant growth future: use growing perpetuity formula
PVH at horizon = (CFH+1)/(r-g)
Horizon Value
- Discount horizon value to determine PV
PVH at year 0 = (CFH+1)/(r-g) * (1/1+r)H
PV(Horizon Value)
PV of Horizon is calculated as follows: Discount horizon value to determine PV
PVH at year 0 = (CFH+1)/(r-g) * (1/1+r)H
PV(Horizon Value)