Stock Horizon Value Calculator

Horizon Value Formula:

\[ Horizon\ Value = Earnings \times \frac{(1 + Growth)}{(Cost - Growth)} \]

Horizon Value:

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1. What is the Horizon Value Formula?

The Horizon Value formula calculates the terminal value of a stock based on its earnings, growth rate, and cost of capital. It's commonly used in financial analysis to estimate the future value of investments beyond the forecast period.

2. How Does the Calculator Work?

The calculator uses the Horizon Value formula:

\[ Horizon\ Value = Earnings \times \frac{(1 + Growth)}{(Cost - Growth)} \]

Where:

$ Earnings $ — Current earnings in dollars ($)
$ Growth $ — Expected growth rate (as a decimal, e.g., 0.05 for 5%)
$ Cost $ — Cost of capital or discount rate (as a decimal)

Explanation: The formula projects the perpetual value of earnings growing at a constant rate, discounted by the cost of capital.

3. Importance of Horizon Value Calculation

Details: Horizon value is crucial in discounted cash flow (DCF) analysis for determining the terminal value of a company, which often represents a significant portion of the total valuation.

4. Using the Calculator

Tips: Enter earnings in dollars, growth and cost as decimals (e.g., 0.08 for 8%). Ensure cost of capital is greater than growth rate for valid results.

5. Frequently Asked Questions (FAQ)

Q1: Why must cost of capital be greater than growth rate?
A: If growth rate exceeds cost of capital, the formula produces negative or infinite values, which are not economically meaningful.

Q2: What time period does this horizon value represent?
A: It represents the perpetual value beyond the explicit forecast period, assuming constant growth forever.

Q3: How accurate is this valuation method?
A: While widely used, it's sensitive to input assumptions. Small changes in growth or cost estimates can significantly impact the result.

Q4: Can this be used for companies with negative earnings?
A: No, the formula requires positive earnings. Alternative methods are needed for companies with negative or volatile earnings.

Q5: What are typical ranges for growth and cost parameters?
A: Growth typically ranges from 2-5% (0.02-0.05) for mature companies, while cost of capital usually falls between 8-12% (0.08-0.12).