A Logical, Rational And Meaningful Runway Periods For Discounted Model
Subject : A Logical, Rational And Meaningful Runway Periods For Discounted Model
.
Total Runway Period (Years)
= Front Runway Period (Shorter Growth Period) + Rear Runway Period (Longer Competitive Moat Advantage Perpetual Period)
= Cost of Invested Capital + (ROIC - Cost of Invested Capital)
= Cost of Invested Capital + Economic Spread
.
Front Runway Period
= Cost of Invested Capital
.
Rear Runway Period
= Economic Spread
= (ROIC - Cost of Invested Capital)
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If Cost of Invested Capital = 5% and ROIC = 5%, Front Runway Period = 5%, Rear Runway Period = Economic Spread = 5 - 5 = 0 years.
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If Cost of Invested Capital = 5% and ROIC = 10%, Front Runway Period =5%, Rear Runway Period = Economic Spread = 10 - 5 = 5 years.
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If Cost of Invested Capital = 5% and ROIC = 15%, Front Runway Period =5%, Rear Runway Period = Economic Spread = 15 - 5 = 10 years.
.
If Cost of Invested Capital = 5% and ROIC = 25%, Front Runway Period =5%, Rear Runway Period = Economic Spread = 25 - 5 = 20 years.
.
If Cost of Capital = 8.5% and ROIC = 20%, Front Runway Period =8%, Rear Runway Period = Economic Spread = 20 - 8.5 = 11.5 years.
.
A sound, logical, rational and meaningful DCF model could then be constructed by using the said Total Runway Period (Years).