Course 404: Putting DCF into Action
Step 4--Calculate Discounted Perpetuity Value
In this course
1 Introduction
2 Step 1--Project Free Cash Flow
3 Step 2--Determine a Discount Rate
4 Step 3--Discount Projected Free Cash Flows to Present
5 Step 4--Calculate Discounted Perpetuity Value
6 Step 5--Add It All Up
7 The Bottom Line

In this step, we use another formula from the last lesson:

Perpetuity Value =
( CFnx (1+ g) ) / (R - g)

CFn = Cash Flow in the Last Individual Year Estimated, in this case Year 10 cash flow
g = Long-Term Growth Rate
R = Discount Rate, or Cost of Capital, in this case cost of equity

For example, we'll use use 3% as the perpetuity growth rate, which is close to the historical average growth rate of theU.S. economy. So, we'll assume that after 10 years, Charlie's Bicycles will also grow at this 3% rate. Plugging the numbers into the formula:

( $1,284 x (1 + .03) ) / (.09- .03) = $22,042 million

Notice that for the cash flow figure we used the undiscounted Year 10 cash flow, not the discounted $542 million. But because we used the undiscounted amount, we still need to express the perpetuity value in present-value terms using this trusty formula:

Present Value of Cash Flow in Year N =
CF at Year N / (1 + R)^N

Present Value of Perpetuity Value =
$22,042 million / (1 + .09)^10 = $9,311 million

Next: Step 5--Add It All Up >>


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