Basic pro forma analysis often estimates the terminal value input using a simple growing perpetuity assumption. While this assumption is easy to implement, it potentially creates an upward bias in some inputs leading to lower firm or project value outputs. The purpose of this paper is to demonstrate a more accurate way to estimate the terminal value input. Further, by allowing for multiple sales growth rates and by not restricting other input variables to necessarily grow at these same rates, a more accurate, flexible, compact, and thorough analysis is possible.
Copyright © 2005 Financial Education Association. This article first appeared in Journal of Financial Education 31 (Fall 2005): 77-98.
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Arnold, Tom, David North, and Roy A. Wiggins, III. "Improving Pro Forma Analysis through Better Terminal Value Estimates." Journal of Financial Education 31 (Fall 2005): 77-98.