Enter the annual cash flow beyond a certain time, the required return, and the growth rate to determine the horizon value.
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Horizon Value Formula
The following formula is used to calculate a horizon value.
HV = ACF / (RR - GR)
- Where HV is the horizon value
- ACF is the annual cash flow beyond a certain time
- RR is the required rate of return
- GR is the growth rate
To calculate horizon value, divide the annual cash flow by the difference between the required rate of return by the growth rate.
Horizon Value Definition
A horizon value is the expected value of a security or investment at a future date.
Horizon Value Example
How to calculate a horizon value?
- First, determine the annual cash flow.
This will be the assumed cash flow for the foreseeable future. For this example, this value is $40,000.00
- Next, determine the required return.
For this example the required return is .40 or 40%.
- Next, determine the growth rate.
The growth rate for this example is .20 or 20%.
- Finally, calculate the horizon value.
HV = ( $40,000.00 / (.40-.20) ) = $200,000.00
FAQ
A horizon value, also known as a terminal value, is the value of a security or asset at some future date.
The horizon value is used for cash flow models and analysis.
