Terminal Value
The value of all cash flows beyond the explicit forecast — typically 60-80% of total DCF value.
Terminal value (TV) captures the company's value beyond your explicit forecast (usually years 6-10 onward into perpetuity). Two methods: (1) Gordon Growth (perpetuity): TV = FCF_final × (1+g) / (WACC−g), assuming constant growth forever. Use g = GDP growth or inflation (~2-3%). (2) Exit multiple: TV = EBITDA_final × exit multiple (e.g., 10x), implying you sell the company at year 10. Critical: TV is typically 60-80% of total enterprise value, so terminal growth assumptions dominate the valuation. A 1% change in terminal g can swing value 20-30%. Always sensitivity-test terminal assumptions. Never use terminal g > long-term GDP growth (~2-3%) unless you believe the company will eventually become larger than the economy.
Formula