Definition
Terminal value captures all cash flows beyond the projection period, typically representing 60-80% of total DCF value. Two common methods: the Gordon Growth Model (perpetuity growth) assumes cash flows grow at a constant rate forever, while the exit multiple method applies an EV/EBITDA multiple to terminal year EBITDA.
functions Formula
TV (Gordon Growth) = FCF(n+1) / (WACC − g)
lightbulb Example
Terminal year FCF is $20M, WACC is 9%, long-term growth rate is 2.5%. TV = $20M × 1.025 / (0.09 - 0.025) = $315.4M.
Warning
Terminal growth rates above 3-4% are unrealistic—no company can outgrow the economy indefinitely.
verified_user Key Points
- Often the largest component of DCF value
- Gordon Growth method assumes perpetual constant growth
- Terminal growth rate should not exceed long-term GDP growth
- Exit multiple method is an alternative approach