Module II· DCF — Terminal ValueBasic
Question
What is the terminal value (TV) and why is it so critical in a DCF?
Answer
Definition
The value of all cash flows beyond the forecast horizon, capitalized at the end of the forecast, then discounted back to t=0.
Why it matters
TV typically accounts for 60–80% of total EV → the DCF becomes highly sensitive to the TV assumptions.
Two methods
- Gordon Growth: perpetual growth
- Exit Multiple: a multiple applied to terminal EBITDA
Best practice
run both, cross-check the implied values.