Terminal Value

A DCF projects cash flows explicitly for a limited number of years, then estimates everything after that as a single terminal value at the end of the forecast. The two common methods are the Gordon Growth (perpetuity) model, which assumes a constant long-run growth rate, and the exit multiple method, which applies a market-derived multiple to the final year’s earnings.

Terminal value commonly makes up 60% to 80% of total enterprise value in a DCF, so the assumptions behind it, the terminal growth rate or the exit multiple, usually matter more to the final answer than the explicit forecast years do.