1.What is an appropriate long-term growth rate? Briefly explain. 2. Should I use the perpetuity grow

Aug 17th, 2016
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1.What is an appropriate long-term growth rate? Briefly explain. 2. Should I use the perpetuity growth method or enterprise value multiple to calculate the Terminal Value in my DCF? Provide a brief defense. 3. Why is the DCF so sensitive to the discount rate? 4. Why do we use WACC to calculate a discount rate? 5. Why use a DCF, comparable transactions and trading comparables? When are the pitfalls / advantages of each? 6. What is your recommendation? Should the team purchase 4 million shares of IPI trading at $18.98 on 6/15/13? Why or why not?

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Answer---------------1'Long-Term Growth - LTG'An investing strategy or concept where a security will appreciate in value for a relatively longperiod of time, whether or not the growth is initiated immediately or later on. Long-termgrowth is a relative term, as the investing horizon differs between investing styles, but theperceived appreciation in the security remains the same.When selecting a long-term growth rate to use in the terminal year of a discounted cash flowmethod (or for use in a capitalized cash flow method), it is common to hear valuationprofessionals state that a companys growth cannot outpace the growth of the economy andthe industry over the long-term and then proceed to select a growth rate of ~3%. Obviously,the appropriate long-term growth rate to use in a particular valuation is a matter of facts andcircumstances, but if long-term inflation estimates are ~2% and long-term real GDP growthfor the U.S. is forecasted around ~3% (i.e., the growth of the economy as a whole, excludinginflation), wouldnt a 5% long-term growth rate make more sense?Answer------------2The terminal value (TV) captures the value of a business beyond the projection period in aDCF analysis, and is the present value of all subsequent cash flows. Depending on thecircumstance, the terminal value can constitute approximately 75% of the value in a 5-yearDCF and 50% of the value in a 10-year DCF. As a result, great attention must be paid toterminal value assumptio

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