Terminal Value
Definition
The value of all cash flows beyond the explicit forecast period in a DCF model.
How It Works
Most DCFs forecast 5-10 years explicitly, then estimate terminal value using either the Gordon Growth perpetuity or an exit multiple on EBITDA.
Formula
TV = FCFF_{n+1} / (WACC - g)
Example
If year 5 FCFF is $100, WACC is 10%, and g is 3%, TV = 100 × 1.03 / (0.10-0.03) = $1,471.
Common Misconceptions
- ✗Terminal value is a small part of total value (it often represents 60-80%)
- ✗Growth rate can exceed WACC
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Common questions about Terminal Value
It captures all value generated after the forecast horizon, which for a going concern is the majority of total value.
The perpetuity growth method (TV = FCF x (1+g) / (WACC - g)) and the exit multiple method (TV = EBITDA x multiple). The growth method is more theoretically grounded; the exit multiple is more common in practice.