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The Risk Premium Factor: A New Model for Understanding the Volatile Forces that Drive Stock Prices by Stephen D. Hassett

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Chapter 8

Case Study 1

Valuation of a High-Growth Business

This chapter builds on the principles in previous chapters to value a high-growth company with a focus on selecting forecast time horizon and calculating a terminal value.

This chapter discusses simplified valuation building on the example of MobAppCo, the mobile phone application development business from previous chapters. In this example, we are attempting to value MobAppCo as a potential internal start-up. Since it is assumed that the reader either already has a good understanding of financial projections or is only looking for high-level insights, the financial statements used in the next two chapters have been simplified to make it easier to highlight the most important valuation elements. The example includes only a simplified income statement and cash flow. In practice, you would also develop a balance sheet, depreciation schedule, goodwill amortization schedule, and other appropriate financial forecasting elements.

The first step is to develop the cost of capital following the steps outlined in Chapter 7. Table 8.1 shows the cost of capital calculation for this business. The calculation is based on our assumptions for beta, tax rate, debt to market value, cost of debt, and risk-free rate as specified.

Table 8.1 Cost of Capital for MobAppCo

Inputs   Notes
Rf 5.0% 30-year Treasury yield
RPF 1.48  
Beta 1.4 Company beta
Long-Term Growth Rate (GR) 2.6% Assumed to grow at pace with economy
Real Interest ...

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