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How many years of forecast should we build on a DCF to value a business?


How many years of forecast should we build on a DCF to value a business?

We saw many of our students who interviewed for banking jobs with leading investment banks last year getting asked this question. The answer is that it depends... If a company is mature and has stable FCFF growth then a five year model typically suffices to value the business. If the underlying company is fast growing company with predictable growth in FCFF then a 10 to 15 year model should be used.

A good example of this is Amazon.

E-Commerce continues to penetrate the overall retail sales by 1% every year in the US. Even though Amazon can still be coined as a fast growing company, an analyst can still project out 10 to 15 years with some level of confidence given how stable the penetration of online sales has been in overall retail sales.



 

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