Terminal Value

STUDY
PLAY
Terminal Value
captures the value of a business beyond the projection period in a DCF analysis, and is the present value of all subsequent cash flows.
Terminal Multiple Method
The terminal multiple method inherently assumes that the business will be valued at the end of the projection period, based on public markets valuations. The terminal value is typically calculated by applying an appropriate multiple (EV/EBITDA, EV/EBIT, etc.) to the relevant statistic projected for the last projected year.
Terminal Multiple Method Formula
TV = LTM Terminal Multiple X Statistic Projected for last 12M of projection period
Perpetuity Growth Method
The perpetuity growth method assumes that the company will continue its historic business and generate FCFs at a steady state forever
Perpetuity Growth Method TV
TV= (FCFn x (1+g) )/ (WACC - g)

FCFn = FCF for the last 12 months of the projection period
g = Perpetuity growth rate (at which FCFs are expected to grow forever)
WACC = Weighted-average cost of capital
Perp Growth Rate Info
The perpetuity growth rate is typically between the historical inflation rate of 2-3% and the historical GDP growth rate of 4-5%. If you assume a perpetuity growth rate in excess of 5%, you are basically saying that you expect the company's growth to outpace the economy's growth forever.
Checkin TV
it is important to calculate the perpetuity growth rate implied by the terminal value calculated using the terminal multiple method, or calculate the terminal multiple implied by the terminal value calculated using the perpetuity growth method.
perpetuity growth rate implied by a terminal EBITDA-based TV may be calculated by using the formula:
Implied g = (TV x WACC - FCFn)/ (TV + FCFn)
Multiple Implied (EBITDA) by the TV calculated using perp growth method
Implied Terminal EBITDA Multiple= TV/EBITDAn
YOU MIGHT ALSO LIKE...