Terminal Value
In short
The value of all cash flows beyond the DCF projection period
In a DCF, you can't project cash flows forever. Terminal value captures everything after your forecast period (usually 5-10 years). It often accounts for 60-80% of total DCF value — so getting the growth rate right matters more than almost any other single input.
Terminal value is typically calculated one of two ways: the perpetuity growth (Gordon Growth) method, which assumes free cash flow grows at a constant rate g forever after the forecast period — TV = FCF × (1+g) ÷ (WACC − g) — or the exit multiple method, which applies a peer-based multiple (e.g., EV/EBITDA) to the final projected year's metric. The perpetuity method requires g to stay below WACC, and analysts generally cap it near long-run GDP or inflation expectations, since no company can outgrow the broader economy forever. Because terminal value is only discounted back from the end of the forecast period and commonly makes up the majority of total DCF value, the choice of terminal method and growth assumption is often the single most consequential judgment call in the whole model.
Formula
TV = FCF × (1+g) ÷ (WACC - g), where g = terminal growth rateRelated concepts
- DCF Model — Imagine a friend promises to pay you $100/year for 10 years. Would you pay $1,000 today? Not quite — money tomorrow is worth less than money today. DCF calculates what future cash flows are worth right now.
- WACC — WACC is the average rate a company pays for all its funding — both equity (shareholders expect returns) and debt (banks charge interest). It's the minimum return a company must earn to create value.
- FCF Margin — If a business earns $100 in sales and has $15 left after paying all its bills and investing in the equipment needed to keep running, its FCF margin is 15%. Cash is what actually funds dividends, buybacks, and debt paydown — accounting profit alone doesn't.