A Simple and Flexible DCF Valuation Formula
9 Pages Posted: 3 Nov 2003
Abstract
The growth-opportunities version of the Modigliani-Miller free cash flow model is used to develop a simple discounted cash flow formula for equity valuation that accommodates gradually diminishing NPVs of future growth opportunities at a constant rate. The model includes some fundamental drivers of a firm's expected future earnings stream, including the planned investment outlay for the next period, the projected growth rate of future investment outlays, and the rate of gradual convergence of the ROEs of future investment outlays to the cost of equity. The formula may be useful when firms expect declining expected earnings growth, negative near-term free cash flows, or negative near-term earnings.
Keywords: Valuation, growth opportunities
JEL Classification: G12, G31
Suggested Citation: Suggested Citation