![]() Implied perpetuity growth rate of cashflows free#The mistake: Applying the terminal growth directly to the free cash flow at the end of the high growth period In this article we are going to discuss what this mistake is, its implications in valuation and why we get so worked up about it. There are many errors that we see people commit in a DCF but, there is one particular mistake that makes our stomach churn. There are, however, certain fundamentals on which one cannot and should not argue. After all, your view of a business can be very different from ours and that is what gets reflected in the assumptions we use when valuing a business. Yes, it is true, but at the same time it is also perfectly alright for that to happen. We often hear the complaint that it is rather easy to change the value of a firm in a DCF by simply tinkering with the assumptions. Used the right way though, it can be an excellent tool in investment decision making. DCF is only a tool and just like a knife it can be disastrous in the wrong hands.
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