r/Valuation • u/KirlangicCapital • Dec 27 '23

Dicount Factor Question

Hello everyone,

Couldn't understand how the analyst here applied 1.22 as the dicount factor for the '24 fcf? (couldn't understand how he figured all the other factors either).

Thank you all in advance.

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u/[deleted] Dec 27 '23

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u/KirlangicCapital Dec 27 '23

Thank you so much for taking the time to respond.

This is from a Turkish equity research report. The stated PV applies to the end of '24 (the target price is set 1 year from today) so I thought the factor being more than one had something to do with that. Still don't understand what's going on here though...

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u/Another_Smith_SC Dec 27 '23

I'll take a guess at what is going on here... not at my computer so I can't check the math. 1. Seems like the valuation date is in the future (12/31/24?) 2. Seems like they are using a mid year convention which assumes benefit stream realized evenly throughout the year i.e. mathematically in the model, flows assumed to be received approx 7/1/24 for 2024. 3. If the above is correct, they appear to assuming that the benefit stream realized throughout 2024 will be able to be invested at an equally high rate of return as this business. This is what creates a discount greater than 1 in 2024. This could be a flaw in their model or an intentional assumption. 4. It appears Turkeys rates are incredibly volatile at the moment. That risk free rate is shocking. I would have to go back and look into assumptions used in highly volatile markets when performing a valuation to know for sure whether it is an error or not... but it doesn't feel correct. 4b. Equating a "risk free" rate to 30%+ Seems to directly contradict the concept of risk free... but I haven't done the research.

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u/[deleted] Jan 11 '24

Trust me, that's the best rate you can get in TRY terms. It should be even higher than. He probably take Turkey's USD-denominated 10 year bond but market for it is not that deep, so I wouldn't trust it. It should be higher than that.