WHAT IS TERMINAL VALUE? (EASIEST EXPLANATION) Straight to the Point #STTP #338

In around two minutes you will know what is Terminal Value. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.

Terminal Value is the projected value of an asset at a certain point in the future.

Terminal value is used to calculate the intrinsic value of a stock using discounted cash flow model.

And if you are not sure what discounted cash flow model or intrinsic value means, feel free to watch my previous videos.

Companies and analysts usually project future values of assets, businesses, or investments for at least 5 years.

The further we go into the future, the harder it becomes to forecast accurately.

And this is where terminal value can help. Theoretically, you can even forecast the value into perpetuity. Which means that you try to estimate the value of an asset or a business, assuming it will generate cash flows forever.

The easiest way of understanding the terminal value is through bonds. Let’s say, we have a bond with 2% coupon rate that matures in 5 years. Its value is $1000. Coupon rate of 2% means that every year you will be paid $20 of interest on your $1000 bond all the way until bond matures, which will happen in 5 years.

So terminal value of this bond is the following. 5 interest payments of $20 each plus $1000 of value at maturity, which equals $1100.

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*None of this is meant to be construed as investment advice, it's for entertainment purposes only. Links above include affiliate commission or referrals. I'm part of an affiliate network and I receive compensation from partnering websites. The video is accurate as of the posting date but may not be accurate in the future.

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