What Is Terminal Value?
MediaWhen valuing a company according to the discount cash flows method, it is customary to divide the future time period into two periods.
The first period is the forecast period, while the second period is all subsequent years.
the terminal value is the sum of the present value of all cash flows beyond a forecast period
The cash flows that the project or the company will generate after the forecast period are called the terminal value.
More practically, the terminal value is the sum of the present value of all cash flows beyond a forecast period based on a specified rate of return.
To calculate the terminal value, we should divide the last cash flow forecast by the difference between the discount rate and terminal growth rate. The formula to calculate terminal value is:
(FCF * (1 + g)) / (r - g)
Where:
FCF = Free cash flow for the last forecast period
g = Terminal growth rate
r = Discount rate
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