The value of an asset, business, or project beyond the anticipated period when future cash flows is estimated is understood as terminal value (TV). The term “terminal value” refers to the belief that a corporation will still develop at a relentless rate after the forecast period has ended. The terminal value often accounts for a major portion of the whole assessed value.
The anticipated present worth of a firm beyond the stated projection period is understood as Terminal Value (TV). Various financial tools, like the Gordon Growth Model, discounted income, and residual earnings computation, employ television. However, discounted income calculations are where it’s most utilized.
Perpetual growth (Gordon Growth Model) and exit multiple are two commonly used ways for calculating terminal value. The primary presupposes that a corporation will create cash flows at a relentless pace indefinitely, whereas the latter expects that a corporation is going to be sold for a multiple of a market metric. Academics embrace the perpetual growth paradigm, whereas investment professionals prefer the exit multiple method.
Under the exit multiple method, Terminal value is determined by:
TV = Last Twelve Months Exit Multiple X Projected Statistic
Meanwhile, under the perpetuity growth model, the terminal value is calculated as follows:
TV = (Free cash flow x (1 + g)) / (WACC – g)
Neither the perpetuity growth model nor the exit multiple technique are likely to provide a very accurate estimate of terminal value in DCF analysis. The strategy of calculating terminal value to utilise is partly determined by whether an investor wants a more optimistic or more conservative forecast.