Terminal value
Terminal value is the estimated worth of a business at the end of an explicit forecast period, capturing all cash flows expected beyond that horizon, typically modelled as a perpetuity growing at a constant rate.
FrameworkDCF valuation
See it move
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A firm's year-five free cash flow of €600,000 grows one more year at 2% to €612,000. Dividing that by the 8% gap between a 10% WACC and the 2% long-run growth rate gives a terminal value of €7,650,000 — a single figure standing in for every cash flow beyond year five, which is then discounted back to the present at the same WACC.
Where it fits
SubjectCorporate FinanceAdvancedTopicBusiness Valuation & DCFAdvanced
The formula
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Variables
- free cash flow in the final explicit forecast year (€)
- assumed perpetual long-run growth rate of free cash flow (decimal)
- weighted average cost of capital (the discount rate) (decimal)
The denominator (WACC − g) must be positive; g is typically set near the long-run nominal GDP growth rate. The resulting TV is then discounted back to today at WACC.