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Q: Where and how should I get the figures for Normalized Top Line Growth, Year 5?
A: The normalized growth assumption is your Year 5 revenue growth estimate. The growth rate provided for Year 2 revenue growth will be faded over time to this input in Year 5. This is an important estimate, so think about it as a mid-cycle forecast. What is the average top-line growth rate of the company through the course of an economic cycle?
Q: Where and how should I get the figures for the year beginning Phase II (6-20)? Earnings before interest after taxes YOY % Growth?
A: Along with the WACC, this estimate is one of the most important drivers behind the model. Similar to thinking about normalized growth for revenue during Year 5 (question above), you should think about what normalized earnings growth would be in a normal revenue environment. Since this is relatively far in the future, you should certainly be very critical of your forecast. Importantly, the firm will grow earnings by this rate for Year 6, and then the growth rate will fade linearly through Year 20 to the perpetuity. Even high-single-digit estimates could be considered aggressive for this input. Use the rule of 72 as a gut-check to see if your forecast is reasonable--how many years will it take for the firm's revenue/earnings to double? Will they ever?
Q: Perpetuity ? Inflation? This number is it supposed to be the inflation number or we can also consider it as the terminal growth?
A: Yes, our model uses inflation as our perpetuity growth assumption. We do not think a firm will be able to grow faster than this rate into perpetuity without further investment beyond mainteneance capex.
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| Posted: 29 Jun 2011 20:57 Back to top |
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Quick question, could you elaborate a little bit on the perpetuity fade?
So I understand the perpetuity ROIC fade, so for instance, I'm modeling a few companies right now. I understand that the ROIC fades to the WACC. Now, does this imply anything about revenue growth, or is it simply ROIC?
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| Posted: 04 Aug 2011 17:35 Back to top |
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Posts:39
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The second phase of Valuentum's model (years 6 through 20) fades the growth rate of EBI (earnings before interest) to inflation (3%) and RONIC (return on new invested capital) to the firm's WACC by year 20. This fade does have implicit assumptions about revenue growth through the beginning EBI growth rate. This rate should approximate what top-line growth in Year 5 of the model will be -- it should reflect roughly a midcycle top-line expectation of the company you are modeling.
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| Posted: 04 Aug 2011 17:37 Back to top |
