DCF & WACC
What are the two ways to calculate terminal value, and how do they differ?
Model answer
Gordon (perpetuity) growth: TV = final-year FCF x (1 + g) / (WACC - g), assuming cash flows grow forever at a modest rate g. Exit multiple: TV = final-year metric (e.g., EBITDA) x a market multiple. Gordon is more theoretical/intrinsic; exit multiple is more market-based. Best practice is to cross-check one against the other.
This is one of the 20 free cards. Sign up free for 10 reps a day from the full 1,500+ bank.
More from DCF & WACC
- Walk me through a DCF.
- Why do you use unlevered free cash flow in a DCF and how do you calculate it?
- What is WACC and how do you calculate it?
- What discount rate do you use if you're discounting levered free cash flow?
- Two identical companies, one has more debt. Which has the higher WACC?
- A DCF gives a value that seems too high. Which assumptions would you check first?