🤔 What Is Terminal Value (TV)?
TV is the projected worth of an asset or business beyond a forecasted time frame. It helps to estimate the long-term financial health.
🎯 Why Should You Care?
TV accounts for a large percentage of a business's total value, making it essential for investors and analysts.
DCF and Terminal Value
📊 DCF and Its Two Main Components
DCF (Discounted Cash Flow) uses forecast periods and terminal value to evaluate an asset's total worth.
⏳ The Forecast Period
Usually spans 3-5 years. It helps to predict short-term cash flows.
Two Common Methods
🔍 Calculating Terminal Value
Two popular methods: Perpetual Growth (or Gordon Growth Model) and Exit Multiple.
📈 Perpetual Growth Method
Assumes constant cash flow growth. Let's see the formula below.
[ FCF x (1 + g) ] / (d – g)
...where...
- FCF: Last forecasted Free Cash Flow
- g: Terminal growth rate
- d: Discount rate (usually WACC)
...so we have to...
1. FCF x (1 + g): Project cash flow for the first year after the forecast period.
2. d - g: Adjust discount rate.
3. Divide the result of step 1 by the result of step 2 to get the Terminal Value (TV), which is the estimated value of all future cash flows.
🏷 **Exit Multiple Method**
Estimates value based on market metrics. Useful for predicting acquisition prices.
Choose Wisely
🤷 Perpetual Growth or Exit Multiple?
Your choice depends on whether you're an investor looking for optimistic or conservative estimates.
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