Terminal Factor (10Y) & Discounted Terminal Model (10Y)
Assuming in the long enough term, the Beta will tend to be 1.
Thus :
.
Terminal Factor
= (1 + Market Risk Premium Ratio + 10Y or above the Long Term Bond Ratio) ÷ Clean Invested Capital Cost Factor
.
Thus:
.
Discounted Terminal Earnings Model (10Y)
= EPS × Terminal Factor × (1 - Terminal Factor¹⁰) ÷ (1 - Terminal Factor)
.
For instance, PDD 2025Q3 TTM :
.
EPS = USD 10.3062664284
.
Market Risk Premium Ratio
= 0.046
.
Bond Ratio = 0.04716
Bond Factor = 1.04716
D/E Ratio = 0.027270204
Prime Ratio = 0.07
Spread Ratio = 0.03
Prime Ratio + Spread Ratio = 0.10
Prime_Spread Factor = 1.10
.
Clean Invested Capital Cost (CICC) Factor
= Clean Discount Factor
= Bond Factor × (1 + D/E × Prime_Spread Factor) ÷ (1 + D/E)
= 1.04716×(1+0.027270204×1.10)÷(1+0.027270204)
= 1.0499398204
.
Terminal Factor
= (1 + Market Risk Premium Ratio + 10Y or above the Long Term Bond Ratio) ÷ Clean Invested Capital Cost Factor
= (1 + 0.046 + 0.04716) ÷ 1.0499398204
= (1+0.046+0.04716)÷1.0499398204
= 1.0411644351
.
Discounted Terminal Earnings Model (10Y)
= EPS × Terminal Factor × (1 - Terminal Factor¹⁰) ÷ (1 - Terminal Factor)
= 10.3062664284×1.0411644351×(1-1.0411644351^10)÷(1-1.0411644351)
= USD 129.5295656011
Beta 1 means Zero Volatility.
.
If ever D/E = 1, then
CICC Factor
= 1.04716×(1+1×1.10)÷(1+1)
= 1.099518
.
Terminal Factor
= (1+0.046+0.04716)÷1.099518
= 0.9942174662
.
Then,
Discounted Terminal Earnings Model (10Y)
= EPS × Terminal Factor × (1 - Terminal Factor¹⁰) ÷ (1 - Terminal Factor)
10.3062664284×0.9942174662×(1-0.9942174662^10)÷(1-0.9942174662)
= USD 99.8410755359
.
Compounding is not linear, CICC & Terminal Factor as well not linear.
.
The non-linearity gives rise to the 8th Wonder, Compounding Interest.
.
The non-linearity also gives rise to the 8th Disaster, Discounting Interest.
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It is double-edged blade, Compounding Interest and Discounting Interest are a pair of inseparable Ying and Yang twins.
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If they are equals, peace.
.
Do the math, if Terminal Factor progresses to the limit→1, let's say 0.999999999999, then,
.
Discounted Terminal Earnings Model (10Y)
= EPS × Number of Years (IF Terminal Factor progresses to the limit→1)
.
10.3062664284×0.999999999999×(1−0.999999999999^10)÷(1−0.999999999999)
= 103.06266428343
.
10.3062664284 × 10
= 103.062664284
= 10 Years of Annual 10.3062664284 adding up
.
The beauty of series summamarion of math.