Lesson 7 of 7 · 13 min
The forecast horizon and long-term projections
Choose an explicit forecast horizon long enough for the business to reach a normal, mid-cycle state, then base the terminal value on normalised cash flow and a realistic long-term growth rate, watching for inflection points.
In short
- The horizon depends on the investment strategy (holding period), industry cyclicality, company-specific factors (e.g. acquisitions, restructuring) and the employer's preferences.
- Average holding period = 1 ÷ portfolio turnover: a 3–5-year horizon implies turnover of about 20–33% a year.
- Normalised earnings are expected mid-cycle earnings without unusual or temporary factors; normalised FCF is mid-cycle CFO adjusted for unusual items, less recurring capex.
- The terminal value captures going-concern value beyond the horizon: normalise the terminal-year cash flow, and ask whether long-term growth will differ from history.
- Inflection points from economic disruption, regulation or technology make the future look different from the past; a terminal multiple should reflect expected long-run growth and risk.
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