Terminal value is the value of an investment
at the time of its maturity. This value is
decided, by considering current value,
interest rate and stable growth rate.
An investment can be a Bond or an Asset.
Formula for calculating Terminal Value :
TV=Principal / (1 + Interest Rate)^Time
1. The Perpetuity Growth Model
g = Perpetuity growth rate (at which FCFs are
expected to grow)
WACC= Weighted Average Cost of Capital
This model assumes that the company will continue its
historic business and it generates FCF’s at a steady
In this method Terminal Value is calculated as:
Terminal = Final Projected Free Cash Flow *(1+g)/ (WACC-g)
2. Exit Approach
This is another way of determining terminal value of cash
flows by using a multiplier of some income or cash flow
measure such as net income, NOPAT, EBITDA.
Example: If you invest $20 and after specific time period if you sell
this investment for $100, then this is an Exit multiple of 5x.
Following is the formula used:
Terminal Value= EBITDAn * Exit Multiple
Where n= terminal year of the projection period
While dealing with terminal value we should
• It is based on forecasting, so in future there
can be fluctuations in real time values which
may cause increase or decrease in actual
• Hence one cannot simply rely on it completely.
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with no ends…
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