Test

In: Business and Management

Submitted By dtoney12
Words 819
Pages 4
Analysis
Terminal Values

However, the valuation calculated above is based on the projected cash flows over the period of five years operations, but since AirThread is a going concern business which means that business operation of AirThread would continue even after the five years, probably till infinity. Meanwhile, the cash flow projection for the future results after five year operation would be more prone to wrong estimations of the revenues and expenses, in addition to this, the future is uncertain and it would be too difficult to calculate the future results of a business because the business is expected to continue for an unlimited future time. Therefore, in order to account for the future cash flows of a going concern business after the projected results we need to calculate a value that would reflect the value of business operation till infinity and to do this a reasonable growth is used to for the estimation of cash flows till infinity, thus, the value of these cash flows till infinity is known as the terminal values.

Weighted Average Cost of Capital and Discounting of Terminal Values

However, the weighted average cost of capital represents the overall cost of financing the company’s operations and this value represents the returns required by the equity holders and the returns required by the debt holders. In case of AirThread, the cost of equity would be calculated using the average returns offered by the market for an equity share with similar characteristics to the equity share of AirThread, further, the risk free rate is also used in the calculation of equity cost. Meanwhile, the risk free rate is the rate offered by the treasury bonds issued by the government and since they are issued by government hence they are assumed to be risk free rates. Additionally, the industry specific risk is also incorporated into the calculation of cost of…...

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