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The DDM is more grounded because it’s based on the company’s actual distributions and potential future value. And it values the company today based on the present value of its dividends and that potential future value (either the stock price or the Equity Value via the TerminalValue calculation).
Well, the short answer is after that forecast period where we estimate each year’s cash flows then discount them, we add a single number at the end to account for all the theoretical years in the future, called the TerminalValue (TV). Explaining The TerminalValue. How do I calculate the TerminalValue?”
SMEs can present challenges with DCF due to limited historical financial data, unreliable information, inadequate financial forecasts, and difficulty in determining terminalvalue. However, market information required for CAPM, such as beta coefficients and risk premiums, may not be available for SMEs.
However, market information required for CAPM, such as beta coefficients and risk premiums, may not be available for SMEs. Lastly, determining the continuity value (or terminalvalue) is a subjective process that often leads to disagreements.
The entire Energy Services vertical is like a “high Beta” play on oil and gas prices. Essentially, the NAV Model is a super-long-term DCF without a TerminalValue. The TerminalValue doesn’t make sense in this vertical because oil and gas resources are finite; you can’t assume that a company will keep producing “forever.”.
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