On the Use of the Terminal-Value Approach in Risk-Value Models

Dorfleitner, Gregor

doi:10.2139/ssrn.2905827

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On the Use of the Terminal-Value Approach in Risk-Value Models

22 Pages Posted: 25 Jan 2017

See all articles by Gregor Dorfleitner

Gregor Dorfleitner

University of Augsburg - Department of Statistics and Mathematical Economic Theory; University of Regensburg - Department of Finance

Date Written: January 25, 2017

Abstract

We extend risk-value models for valuing streams of risky cash flows by introducing the well-known concept of terminal value (based on the application of the perpetuity formula) in this context, where it cannot be used straight forward. For a constant growth assumption we are able to derive upper and lower bounds for the terminal value in case of a translation-invariant and in case of a position-invariant risk measure. For both cases we also derive an exact formula under a special growth assumption for the future cash flows. Furthermore, we provide results on the applicability of the general findings if the log-return of the risky investment follows a Brownian motion.

Keywords: Risk-value models, business appraisal, firm valuation

JEL Classification: G32

Suggested Citation: Suggested Citation

Dorfleitner, Gregor and Dorfleitner, Gregor, On the Use of the Terminal-Value Approach in Risk-Value Models (January 25, 2017). Available at SSRN: https://ssrn.com/abstract=2905827 or http://dx.doi.org/10.2139/ssrn.2905827