Terminal Value Formula | How to Calculate Terminal Value in DCF?

In this video on Terminal Value Formula, here we discuss how to calculate the terminal value using method of perpetuity growth and Exit multiple growths with examples & excel template.

𝐖𝐡𝐚𝐭 𝐢𝐬 𝐓𝐞𝐫𝐦𝐢𝐧𝐚𝐥 𝐕𝐚𝐥𝐮𝐞 𝐅𝐨𝐫𝐦𝐮𝐥𝐚 𝐢𝐧 𝐃𝐂𝐅?
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Terminal value at the end of a specific period is known as the value of an investment. Terminal value formula helps to calculate a business ' value beyond the defined forecast period.

𝐓𝐨𝐩 𝟑 𝐌𝐞𝐭𝐡𝐨𝐝𝐬 𝐭𝐨 𝐂𝐚𝐥𝐜𝐮𝐥𝐚𝐭𝐞 𝐓𝐞𝐫𝐦𝐢𝐧𝐚𝐥 𝐕𝐚𝐥𝐮𝐞
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#1 - 𝐏𝐞𝐫𝐩𝐞𝐭𝐮𝐢𝐭𝐲 𝐆𝐫𝐨𝐰𝐭𝐡 𝐌𝐞𝐭𝐡𝐨𝐝

The Perpetual Growth Method is also known as the Gordon Growth Perpetual Model which is the preferred method.

In this process, it is assumed that the company's growth will continue and capital return will be more than the capital cost.

Terminal Value Formula = FCFF6 / (1 + WACC)6 + FCFF7 / (1 + WACC)7 + …..+ Infinity

#2 - 𝐄𝐱𝐢𝐭 𝐌𝐮𝐥𝐭𝐢𝐩𝐥𝐞 𝐆𝐫𝐨𝐰𝐭𝐡 𝐌𝐞𝐭𝐡𝐨𝐝

Exit Multiple Method is used with assumptions that market multiple bases to value a business.

Terminal Value Formula = Last Twelve months Terminal Multiple * Projected Statistic

#3 - 𝐍𝐨 𝐆𝐫𝐨𝐰𝐭𝐡 𝐏𝐞𝐫𝐩𝐞𝐭𝐮𝐚𝐥 𝐌𝐨𝐝𝐞𝐥

There is no growth perpetuity formula used in industry where there is a lot of competition and the chance to earn excess return tends to move to zero.

Terminal Value Formula = FCFF6 / WACC

[pecke]

in minute 13, you meant that the Growth rate should be higher than the wacc and not the opposite. so you should have said the opposite there, right?