LOS l: Explain terminal value and discuss alternative approaches to determining the terminal value in a discounted dividend model.

Q1. The growth rate for a firm is forecast to be 8% for three years and 5% thereafter. If the required rate of return is 10%, and the dividend expected in year three is $4.67 per share, what will be the present value of the terminal value of the company?

A)   $57.14.

B)   $91.11.

C)   $73.68.

Q2. As an alternative to using a dividend discount model to estimate the terminal value of a firm, many analysts prefer to use:

A)   asset amortization schedules.

B)   internal rates of return.

C)   market multiples.

Q3. Multi-stage models determine the value of a firm as the sum of the value during the growth stage(s) and the firm’s:

A)   market value.

B)   transitional value.

C)   terminal value.

LOS l: Explain terminal value and discuss alternative approaches to determining the terminal value in a discounted dividend model. fficeffice" />

Q1. The growth rate for a firm is forecast to be 8% for three years and 5% thereafter. If the required rate of return is 10%, and the dividend expected in year three is $4.67 per share, what will be the present value of the terminal value of the company?

A)   $57.14.

B)   $91.11.

C)   $73.68.

Correct answer is C)

Terminal Value = ($4.67 × 1.05) / [(1 + 0.10)³ (0.10 ? 0.05)] = $73.68

The terminal value is computed at the end of year three, based on year four’s dividends, and discounted back to the present at the required rate of return.

Q2. As an alternative to using a dividend discount model to estimate the terminal value of a firm, many analysts prefer to use:

A)   asset amortization schedules.

B)   internal rates of return.

C)   market multiples.

Correct answer is C)

Many analysts prefer to forecast the terminal value of a firm by predicting earnings or growth of assets or some other characteristic of the firm and applying a price-to-earnings ratio or other market multiple.

Q3. Multi-stage models determine the value of a firm as the sum of the value during the growth stage(s) and the firm’s:

A)   market value.

B)   transitional value.

C)   terminal value.

Correct answer is C)

The valuation is the sum of the current value of projected dividends and the terminal value of the firm based either on the forecast market value of the present value of the dividend stream, thereafter assuming a constant growth rate.

thanks a lot

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