Terminal value formula
Terminal value is the value, at the end of a DCF forecast, of all the cash flows after it. With perpetuity growth it is next year's unlevered free cash flow divided by WACC minus the growth rate.
- Perpetuity growth
TV = FCF × (1 + g) ÷ (WACC − g)
Grow the final year's free cash flow one more year, then divide by the gap between WACC and growth.
- Exit multiple
TV = EBITDA × multiple
Final-year EBITDA times the multiple that similar companies trade at today.
- Value today
PV = TV ÷ (1 + WACC)^N
Either result sits at the end of the forecast, so discount it back N years.
Inputs
Worked example
- Perpetuity growth method
- Next year's free cash flow200.0 × (1 + 2%)
- $204.0m
- WACC minus growth10% − 2%
- 8%
- Terminal value204.0 ÷ 8%
- $2,550.0m
- Worth today, 5 years out2,550.0 × 0.621
- $1,583.3m
- Exit multiple method
- Terminal value300.0 × 9x
- $2,700.0m
- Worth today, 5 years out2,700.0 × 0.621
- $1,676.5m
- Cross-check
- EBITDA multiple the growth method implies2,550.0 ÷ 300.0
- 8.5x
- Growth rate the exit multiple implies(TV × WACC − FCF) ÷ (TV + FCF)
- 2.41%
How to calculate terminal value
Four steps, in the order you do them in a DCF.
1. Take the last forecast year
Use the free cash flow and EBITDA of the final year. Make sure that year looks normal, with capex and growth you could keep up for ever.
2. Pick the method, then run both
Perpetuity growth values the cash flows. The exit multiple values what the market pays for them today. Use one as the answer and the other as the check.
3. Compare what each implies
A growth rate implies a multiple, and a multiple implies a growth rate. In the example, 2% growth implies 8.5x EBITDA, close to the 9x exit multiple, so the two agree.
4. Discount it to today
The terminal value is a number in year five. Multiply it by the year-five discount factor, then add it to the present value of the forecast cash flows.
Explain terminal value out loud
Knowing the formula is half of it. Interviewers ask which method you would use, why, and what the number implies. Practice the answer with an AI interviewer.
Questions people ask
What growth rate should I use for terminal value?
Keep it at or below the long-run growth of the economy, which in practice means about 2% to 3%. A higher rate says the company outgrows the economy for ever.
Should I use perpetuity growth or an exit multiple?
Run both and compare. If perpetuity growth implies a multiple far from where similar companies trade, one of your assumptions needs a reason. In the example they agree: 8.5x against 9x.
Why is so much of a DCF's value in the terminal value?
A healthy company keeps producing cash after year five, and the terminal value stands for all of those years at once. In many DCFs it is more than half of enterprise value, which is why a sensitivity table on growth and WACC matters.
Can terminal growth be higher than WACC?
No. The formula divides by WACC minus growth, so at or above WACC it gives a negative or infinite value. In practice terminal growth sits near 2% to 3%, well below any sensible WACC.