There are two formulas for terminal value (based upon price multiples) that we should know for the exam, but do not make sense to me:
one of the formulas is FCF + (P/FCF)…this does not make intuitive sense to me.
Also do not get the FCF/(WACC - g) formula as well.
many thanks,
sarang3
#2
almost all of the formulas were a derivation of DDM which is D1 / (r-g).
Dividend shows cash flow by equity holders only, thus r is used (cost of equity)
FCF shows cash flow for all capital contributors, thus WACC needs to be used in this discount model.