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Terminal Value
The estimated value of a business beyond the explicit forecast period in a DCF model.
Terminal Value
Terminal value captures the bulk of a company's value in a DCF model—often 60–80% of the total.
Two common methods
Gordon Growth Model
TV = Final Year FCF × (1 + g) ÷ (r − g)
Where g = perpetual growth rate (typically 2–3%) and r = discount rate
Exit Multiple Method
TV = Final Year EBITDA × Industry EV/EBITDA Multiple
Which method to use
- Gordon Growth: Better for stable, mature companies
- Exit Multiple: Better when comparable company data is readily available
Common mistakes
- Using a perpetual growth rate higher than GDP growth (unsustainable)
- Not cross-checking both methods against each other
- Ignoring that terminal value dominates the DCF result
Sensitivity
Because terminal value is so large relative to the total, small changes in the growth assumption can dramatically swing your valuation. Always run sensitivity analysis on both the growth rate and discount rate.
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Valuation
Difficulty
Beginner
Reading Time
1 min
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Net asset value calculated as total assets minus total liabi...
P/E Ratio
Price-to-earnings ratio, a common valuation metric.
Price-to-Sales Ratio
A valuation metric comparing a company's stock price to its...
EV/EBITDA
Enterprise value divided by EBITDA, used to compare companie...
Price-to-Book Ratio
Compares a stock's market price to its book value per share.
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Where You'll See This
This concept appears throughout stock detail pages and financial data.