averaging terminal values

[nr1fraudmaxxer]

In a DCF model should i average the terminal values or stick to one like the exit model ev/ebitda or perpetural growth method. While google and inevstopedia says to average them. Some sources says that every major investment-bank or Big-4 valuation manual (and the CFA curriculum) is explicit: “Select one primary terminal-value technique and use the second only as a reasonableness test. Averaging the two is not permitted because it double-counts value and mixes incompatible assumptions.”
Also:
CFA Institute (Level II, 2024): “Analysts must not average terminal values derived from different methodologies; instead, one method should be selected and the other used for a reasonableness check.”
some says:
if the company has a durable competitive advantage and reliably reinvests at high returns use Perpetual Growth.
If the company has average economics or uncertain long-term returns use Exit Multiple.

 

[aids]

I don't know how averaging would lead to double counting, but this is correct:

Analysts must not average terminal values derived from different methodologies; instead, one method should be selected and the other used for a reasonableness check.

 

[aids]

if the company has a durable competitive advantage and reliably reinvests at high returns use Perpetual Growth.
If the company has average economics or uncertain long-term returns use Exit Multiple.

Which company are you modelling?

 

[nr1fraudmaxxer]

Which company are you modelling?

alot haha unh, asml, etc

I don't know how averaging would lead to double counting, but this is correct:

Double counting doesn’t mean you’re literally adding the same cash flow twice it means the same economic value is being paid for twice under two different stories. The two prices overlap on the identical forward cash flows, so a straight average charges you for those cash flows twice once inside the multiple, once inside the formula.

 

[nr1fraudmaxxer]

I don't know how averaging would lead to double counting, but this is correct:

I’ve averaged for a long time in my model, but I guess its flawed.

 

[aids]

alot haha unh, asml, etc

Double counting doesn’t mean you’re literally adding the same cash flow twice it means the same economic value is being paid for twice under two different stories. The two prices overlap on the identical forward cash flows, so a straight average charges you for those cash flows twice once inside the multiple, once inside the formula.

This is not double counting, I assume what your GPT is referencing is post-forecast cash flows being the same for both.

 

[nr1fraudmaxxer]

This is not double counting, I assume what your GPT is referencing is post-forecast cash flows being the same for both.

Yea it probably refers double counting to flawed averaging or whatever

 

[aids]

Yea it probably refers double counting to flawed averaging or whatever

Double counting is counting the same transaction twice giving you an inflated ledger. A flawed average wouldn't be in any way related. You aren't counting any transaction twice, and even if it is in context to counting an average twice, you are dividing by two to account for this.

 

[nr1fraudmaxxer]

Double counting is counting the same transaction twice giving you an inflated ledger. A flawed average wouldn't be in any way related. You aren't counting any transaction twice, and even if it is in context to counting an average twice, you are dividing by two to account for this.

Youre right that its not ledger double counting. But the economic effect is identical no? Pricing the same post forecast cash flows under two mutually exclusive exit strategies and then averaging them which creates a flawed terminal value thus an inflated EV. The division by two does not correct the error. It distributes the phantom premium evenly between two incompatible end games (sell vs keep).

 

[nr1fraudmaxxer]

Which company are you modelling?

Are you studying finance or self taught?

 

[aids]

Are you studying finance or self taught?

Yes.

 

[aids]

Youre right that its not ledger double counting. But the economic effect is identical no? Pricing the same post forecast cash flows under two mutually exclusive exit strategies and then averaging them which creates a flawed terminal value thus an inflated EV. The division by two does not correct the error. It distributes the phantom premium evenly between two incompatible end games (sell vs keep).

You are obviously counting something twice but you are doing it specifically to average.
Whether or not it is considered double counting does not change the fact it is flawed however--it still is flawed.

 

[nr1fraudmaxxer]

You are obviously counting something twice but you are doing it specifically to average.
Whether or not it is considered double counting does not change the fact it is flawed however--it still is flawed.

Ye i agree its flawed

 

[nr1fraudmaxxer]

Yes.

What year?

 

[aids]

What year?

Finishing second now.