Hi Arvind, this is the most widely used valuation technique I have seen and I feel it is also most abused. There is no reasonable basis for arriving at PE ratio after 3 to 5 years. Most people use current PE ratio and adjust it up or down to arrive at PE ratio after 3 to 5 years. Most of these adjustments are driven by opinion polls and sentiments. Analysts spend great deal of time in determining EPS for next 3 to 5 years and just use an arbitrary multiple to arrive at terminal value when that exit multiple is in fact the most important input in this type of valuation technique .
When EPS for next 3 to 5 years can be accurately estimated, market will already price that and hence current PE will reflect expected earnings growth. Taking such PE ratio and applying it to EPS after 3 to 5 years effectively results in double counting of earning growth.
DCF is logically correct way but it requires many inputs and it is sensitive to some of these inputs which cannot be estimated with a reasonable degree of accuracy.
I have attempted one such model that use dividends as a measure of cashflow rather than free cash flow to address some issues in determining these sensitive inputs. My model is presented here.