Growth Appreciation Period (GAP)

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The Growth Appreciation Period is the number of years that a business is expected to earn a ROIC greater than WACC on new investments.

GAP is the amount of time a business can grow its economic earnings. After the GAP, it is assumed that incremental investments by the business earn ROIC equal to WACC or the net present value of all investments equal zero. Warren Buffett refers to GAP as the moat around a business' castle. It is also known as the CAP (Competitive Advantage Period) and the forecast growth horizon.

Our dynamic DCF model calculates share prices attributable to multiple GAP scenarios. For example, the value of the company with a twenty-year forecast growth horizon assumes the company will enjoy a twenty-year GAP. Without a model that encompasses this long-term approach, investors are unable to assess the complete expectations embedded in any asset price.

Market-Implied GAP

The market-implied GAP is the number of years that a company's stock price implies it will earn ROIC greater than WACC on incremental investments. Provided that the estimates entered on the forecast page are based on market consensus projections, the market-implied GAP represents the forecast horizon needed in a DCF model to arrive at a value equal to the current market price.

How GAP Is Used in our Discounted Cash Flow (DCF) Model

The key difference between our DCF and others is that we calculate the value attributable to equity shareholders over multiple time periods, not just 5 or 10 years. In addition, our yearly calculations represent different GAPs because they are based on a Terminal Value that assumes the company generates no future incremental profits. To be specific, our Terminal Value for each annual calculation is a perpetuity calculation that assumes no future growth after each GAP. The formula is NOPATt+1 / WACC. Using a Terminal Value that assumes no future profit growth enables our DCF model to calculate the specific value of companies implied by each Growth Appreciation Period.

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