TERMINAL VALUE, when used in a discounted cash flow valuation, the cash flow is projected for each year into the future for a certain number of years, after which unique annual cash flows cannot be forecasted with reasonable accuracy. At that point, rather than attempting to forecast the varying cash flow for each individual year, one uses a single value representing the discounted value of all subsequent cash flows. This single value is referred to as the terminal value. When a firms cash flows grow at a "constant" rate forever, the present value of those cash flows can be written as: Value = Expected Cash Flow Next Period / (r - g)where, r = Discount rate (Cost of Equity or Cost of Capital) g = Expected growth rate. This "constant" growth rate is called a stable growth rate and cannot be higher than the growth rate of the economy in which the firm operates. While companies can maintain high growth rates for extended periods, they will all approach "stable growth" at some point in time. When they do approach stable growth, the valuation formula above can be used to estimate the "terminal value" of all cash flows beyond.
UNRESTRICTED ASSETS are assets / resources which are not restricted for use by legal or contractual requirements and may be used for any purpose.
LEHMAN FORMULA is a compensation formula originally developed by investment bankers Lehman Brothers for investment banking services:
- 5% of the first million dollars involved in the transaction for services rendered
- 4% of the second million
- 3% of the third million
- 2% of the fourth million
- 1% of everything thereafter (above $4 million)
NOTE: Most investment bankers now require an additional multiplier to offset inflation.
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