Terminal value
Also called: continuing value, perpetuity growth method, exit multiple method, Gordon growth model
In a DCF, the value of all cash flows after the explicit forecast period, often the largest part of the valuation.
The perpetuity growth method uses final-year cash flow × (1 + g) ÷ (discount rate − g); the exit multiple method applies a valuation multiple to the final year. Long-run growth should not exceed the economy's long-run growth, must be below the discount rate, and needs matching reinvestment.
Example
Final-year free cash flow of ₹200 crore, a 12% discount rate and 4% growth give a terminal value of ₹2,600 crore.
Learn more in these lessons
- Terminal valueWhat is terminal value, and why does it matter so much in a DCF?
- Discounted cash flow valuationHow do you build a discounted cash flow valuation?
Related terms
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