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Assessing Growth Estimates in IPO Valuations—A Case Study
Author(s) -
Mills Roger W.
Publication year - 2005
Publication title -
journal of applied corporate finance
Language(s) - English
Resource type - Journals
eISSN - 1745-6622
pISSN - 1078-1196
DOI - 10.1111/j.1745-6622.2005.021_1.x
Subject(s) - perpetuity , initial public offering , discounted cash flow , terminal value , valuation (finance) , cash flow , economics , econometrics , financial economics , actuarial science , monetary economics , finance , operating cash flow
A common practice in discounted cash flow (DCF) valuations of growth businesses is to forecast cash flows over some initial period (say, five years) and then use a “perpetuity‐with‐growth” calculation to estimate the “terminal” value beyond that period. The assumed growth rate generally has a very large effect on the overall valuation, and there is no universally accepted method for challenging the assumptions underlying the selected growth rate. This article presents a framework based on the concept of Market Implied Competitive Advantage Period (MICAP) analysis that can be used to evaluate such growth assumptions and then demonstrates the use of that framework in the IPO valuation of Jordan Telecom.