Investment BankingAdvanced
Terminal Value
The value of all cash flows beyond the explicit forecast period in a DCF.
Detailed explanation
Usually calculated with the Gordon growth method or an exit multiple. It often makes up the majority of DCF value.
Formula
TV = FCFₙ × (1 + g) ÷ (WACC − g)
Example
FCF ₹100 cr, g 5%, WACC 12% → TV = 105 ÷ 0.07 = ₹1,500 cr.
Why it matters
Because it dominates DCF value, its assumptions need the most scrutiny.
Key points
- Growth g must be below WACC.
- Exit multiple method is the alternative.
- Discount it back to today.
Related terms
More in Investment Banking
Educational content only. Definitions and examples are illustrative and are not investment, tax or legal advice.