Abstract
The valuation of firms with discounted cash flows poses the problem of quantifying the terminal value. Attention is centered on one of the most common methods of doing it: assuming that the company will operate forever and thus calculating the final value as the present value of a perpetuity. Seven important errors have been identified when this procedure is followed. They are caused by a failure to correctly account for the instability of the free-cash flows during the projection horizon, lack of consistency between the last free-cash flow of the horizon and the assumptions about reinvestment and growth, failure to account for the possibility to grow through external funding, inconsistency between the market exchange rate and the equilibrium exchange rate when working in different currencies, ignoring the possibility of different phases of growth, and setting up growth rates with little concern for the characteristics of the firm and the industry, inflation, market growth or market share. It is hoped that the proposed corrections will help to improve future valuation exercises.
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