Terminal value calculator

Nobody can forecast a company year by year forever, so a DCF forecasts explicitly for five or ten years and then puts a single number on everything after that. This is the terminal value, and in most models it is the majority of the answer.

There are two ways to arrive at it. The perpetuity growth method assumes the business settles into growing slowly and steadily forever, and values that stream directly. The exit multiple method assumes you sell the business at the end of the forecast for some multiple of its earnings, the way a comparable business trades today.

Neither is more correct. Running both and comparing them is the useful move: if they disagree wildly, one set of assumptions is doing something the other is not, and finding out which is worth more than either number.

Perpetuity growth:  TV = FCF(final) x (1 + g) / (d - g)
Exit multiple:      TV = metric(final) x multiple

Free cash flow of $100m in the final forecast year, a 10% discount rate and 2.5% terminal growth. Alternatively, EBITDA of $250m and a 12x exit multiple.

1. 1Perpetuity: 100 x 1.025 = 102.5, divided by (0.10 - 0.025) = 0.075.
2. 2That gives $1,367m, sitting at the end of the forecast period.
3. 3Exit multiple: 250 x 12 = $3,000m at the same point in time.

• The terminal value is expressed in the final forecast year's money. It still has to be discounted back to today before it means anything.
• If it accounts for more than about 80% of your total value, the forecast period is doing almost no work and the model is really just a bet on perpetual growth.
• Terminal growth should not exceed long-run economic growth, so something in the region of 2% to 3% for a mature business. Anything higher assumes the company eventually becomes the whole economy.

• Setting terminal growth close to the discount rate. The gap between them is the denominator, so as it narrows the value explodes. This calculator refuses to return a number when growth meets or exceeds the discount rate.
• Forgetting to discount the result back to the present. It is a future amount, not a present one.
• Picking an exit multiple from today's market for a business you are valuing ten years out, without asking whether that multiple is itself high or low by historical standards.

What each of these inputs actually is, where it comes from in a filing, and where it misleads.