Terminal value.
In plain English
No analyst forecasts cash flows forever, so a discounted cash flow model projects a handful of years in detail and then uses a terminal value to represent everything after that. It is usually calculated either by assuming cash grows at a modest constant rate forever, or by applying an exit multiple to the final projected year. Both approaches are then discounted back to today like any other cash flow. In many models the terminal value accounts for most of the total answer. That concentration is the reason valuation arguments so often come down to a single assumption about the distant future.
01Why it matters
When most of a valuation sits in the terminal value, the model is telling you the answer depends mainly on years nobody actually forecast.
02The math, step by step
Final-year cash flow is $50 million, expected to grow 2 percent forever, discounted at 9 percent. $50 million times 1.02 divided by 0.07 gives a terminal value of about $728 million before discounting it back to today.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Liquidation value is what the assets would fetch if the business shut down and sold everything. Terminal value assumes the opposite: that the business keeps operating indefinitely. They answer different questions and rarely produce similar numbers.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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