Terminal Value
Definition
Terminal value captures all value beyond the explicit forecast period of a DCF — the present value (as of the final forecast year) of cash flows from year N+1 to perpetuity. It is estimated two ways: the Gordon growth (perpetuity growth) method, TV = final-year FCF x (1 + g) / (WACC − g), or the exit multiple method, TV = final-year metric (usually EBITDA) x an assumed multiple.
The terminal value is then discounted back to today at WACC like any other cash flow. Because it typically represents the majority of total DCF value — often well over half, depending on the forecast length and growth profile — its assumptions dominate the output.
Best practice cross-checks the two methods: compute the growth rate implied by your exit multiple, and the multiple implied by your perpetuity growth rate, and confirm both are defensible.
Why interviewers ask
"How do you calculate terminal value?" and "what growth rate would you use?" (at or below long-run GDP/inflation — a company cannot outgrow the economy forever) are guaranteed. Traps: forgetting to grow the final-year FCF one more period in the Gordon formula, using g ≥ WACC (the formula breaks), and forgetting the TV itself must still be discounted to present.
Related terms
Interviews don't test definitions — they test recall under pressure.
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