What Is Terminal Value?
Terminal value (TV) represents the value of a business beyond the explicit forecast period in a discounted cash flow (DCF) analysis. Since you cannot project cash flows infinitely, terminal value captures the company's value from the end of the projection period into perpetuity.
TV = FCF × (1 + g) / (r - g)
Where:
FCF = Final year free cash flow
g = Perpetual growth rate
r = Discount rate (WACC)
Calculation Methods
Gordon Growth Model: Assumes cash flows grow at a constant rate forever. Most common for stable, mature businesses.
Exit Multiple Method: TV = Final Year EBITDA × Exit Multiple. Used when comparable company multiples are available.
Choosing the Growth Rate
The perpetual growth rate (g) should typically not exceed the long-term GDP growth rate (2-3%). Using a higher rate implies the company will eventually become larger than the economy, which is unrealistic.
Discount Rate Considerations
The discount rate (r) must exceed the growth rate (g). A common approach uses WACC (Weighted Average Cost of Capital). The difference (r - g) is called the spread and significantly impacts the terminal value.
How to Use
Enter the final year free cash flow, the perpetual growth rate, and the discount rate. The calculator instantly computes the terminal value using the Gordon Growth Model.
Why Terminal Value Matters
Terminal value often represents 60-80% of a company's total DCF value, making it the most influential component. Small changes in growth rate or discount rate assumptions can dramatically change the valuation.