How is long term growth estimated and what is the most accurate method of valuation?

Question

anonymous · Answer

Long term growth is assumed as equal to the risk free rate or lower than the risk free rate depending on your assumptions.

There are no accurate method of valuation, each one has its own strength and weaknesses; use a mix of to arrive at your final decision.

anonymous · Answer

It will depend on what you are valuing. If for instance you want to value the equity in the firm you can use the ROE * Retention Ratio to get a fundamental sustainable long-term growth rate or if you are valuing the firm as a whole than use ROC * Reinvestment Rate. What I do using the discounted cash flow model is use a weighted average growth rate. I calculate the above mentioned fundamental determinate growth rate and than use an outside or my own estimate as well as the historical growth rate and give each a specific weight. I try and use a heavier weight on the fundamental calculation of growth because it keeps your discounted cash flow model internally consistent. Hope that helps!

anonymous · Answer

Dt515627, the formulas for the growth rate that you wrote are the ones for the short term and not the long term growth as requested by pelletbrick999 (hahah). The rest of what you wrote I agree with.