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      "text": "The purpose of adjustments to the final year is to reflect how the business will grow into perpetuity might be different from what the business looks like at the end of the final year.",
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      "text": "Financial Modeling Course References: Course 8, Lesson 4 (Discount Rate), Course 8, Lesson 5 (WACC), Course 8, Lesson 6 (Cost of Debt), Course 8, Lesson 11 (Cost of Equity)",
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      "text": "Financial Modeling Course References: Course 8, Lesson 23-24 (Present Value of Terminal Value)",
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      "text": "Three examples of discount rates are WACC, Cost of Equity and Cost of Debt.",
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      "text": "One common adjustment is to adjust D&A and CapEx so that CapEx is slightly higher than D&A. This way, we're feeding into our perpetuity model a business that always spends a bit more than what it's depreciating. Another common adjustment is to normalize tax rates. Sometimes companies have abnormal tax rates in the forecast period.",
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      "text": "222. Is there a point where DCF valuation is too reliant on Terminal Value? What do you do?",
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      "text": "However, if the Terminal Value is calculated using the Terminal Multiple Method, I would discount it using the End-of-Year Convention. I would discount the Terminal Value by one plus the discount rate raised to the power of the discount period under the End-of-Year Convention.",
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      "text": "The purpose of adjustments to the final year is to reflect how the business will grow into perpetuity might be different from what the business looks like at the end of the final year.",
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      "text": "Some people say that if Terminal Value makes up >80% of the intrinsic value, then it's too reliant. In that case, they say you should adjust your assumptions. To us, that makes no sense. There's no finance law that says Terminal Value must be less than 80% of the intrinsic value.",
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      "text": "225. What do we usually use as the discount rate in a DCF?",
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      "text": "No. We should look at the assumptions that go into the DCF valuation on an objective basis. If the assumptions are valid and the DCF indicates that the bulk of the value is coming from Terminal Value, that's just the result of an objective analysis. We shouldn't alter an otherwise objective analysis to satisfy a preconceived notion that Terminal Value should or shouldn't make up more than a certain percentage of the value.",
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      "text": "224. Please provide at least three examples of discount rates.",
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      "text": "223. What adjustments, if any, should we make to the final year's UFCF in a DCF before using it for the Perpetuity Growth Method?",
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      "text": "No. We should look at the assumptions that go into the DCF valuation on an objective basis. If the assumptions are valid and the DCF indicates that the bulk of the value is coming from Terminal Value, that's just the result of an objective analysis. We shouldn't alter an otherwise objective analysis to satisfy a preconceived notion that Terminal Value should or shouldn't make up more than a certain percentage of the value. — Financial Modeling Course References",
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