In this session, we started by looking at fundamental growth in all its variants. With EPS, net income and operating income, we argued that the long term or sustainable growth rate for a firm is a function of how much it reinvests and how well it reinvests, with the measurement of each varying depending upon the earnings metric. We then looked at the possibility of efficiency growth in the short term, as ROE or ROIC change, and finally at the most general way of estimating cash flows, where we start with revenues, then forecast margins and tie up loose ends with reinvestment, tied to sales. In the final part o the session, we looked ways to keep the terminal value from running away with your valuation by capping growth, limiting the growth period and reinvesting enough to sustain growth. I have two reading suggestions if you are interested. First, I mentioned my incredibly boring paper on accounting returns. You can find it here:
Second, I did a series of posts on terminal value which capture pretty much everything I know about the number. You can find them on my blog.
Start of the class test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/tests/cftests2.pdf
Post Class Test: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session10test.pdf
Post Class Test Solution: http://www.stern.nyu.edu/~adamodar/pdfiles/eqnotes/postclass/session10soln.pdf