- a portion of the value based on the initial, explicit forecast period, and,
- a portion of the value based on continuing performance beginning at the end of the explicit forecast period.
Estimated value of a company
= Estimated Operating Value of the initial, explicit forecast period + Continuing Value beginning at the end of the explicit forecast period.
The continuing value (CV)
- often exceeds half of the total estimated operating value, and
- when early years have negative cash flows, the continuing value can exceed the total estimated operating value.
Two formulas for estimating continuing value
There are two formulas for estimating continuing value:
- the discounted cash flow (DCF) formula, and
- the economic-profit formula.
Other methods for estimating continuing value exist.
The convergence formula is related to the preceding formulas, for example, and it assumes that excess profits will eventually be competed away.
Some methods do not depend on the time value of money. Those methods include
- using multiples such as P/E,
- estimates of liquidation value and
- estimates of replacement costs.