Capital Expenditures, Depreciation, and Amortization in the Gordon Growth Model

This article discusses two common errors when calculating terminal value using the Gordon growth model—overstating depreciation in relation to capital expenditures and overlooking amortization's time limits. For a growing company, normalized capital expenditures must be materially higher than depreciation. Amortization of intangible assets is worth the present value of the future tax benefits and should be excluded from the base on which terminal value is calculated. Instead, the present value of the benefits should be added to enterprise value. Similar adjustments should be made for tax-loss carryforwards, limited-life royalties, and other limited-life income and expenses.