Valuation Updated November 2026

Terminal value

Terminal value (TV) is the value of all cash flows beyond the explicit forecast. Perpetuity growth: TV = FCF_n x (1 + g) / (WACC - g). Exit multiple: TV = EBITDA_n x multiple. Either way, TV sits at year n and is discounted by (1 + WACC)^n.

Syntax

TV = FCF_n x (1 + g) / (r - g)   or   TV = EBITDA_n x exit multiple

Part	What it is
`FCF_n`	Unlevered free cash flow in the final forecast year
`g`	Perpetual growth rate, usually 1% to 3%, below long-run GDP growth
`r`	Discount rate (WACC)
`exit multiple`	EV / EBITDA of comparable companies or transactions

Examples

Perpetuity growth: FCF_5 = 100, g = 2%, WACC = 9%
=100 * (1 + 2%) / (9% - 2%)

Result: 1,457.14

Exit multiple: EBITDA_5 = 150, multiple = 8.0x
=150 * 8

Result: 1,200

Present value of the 1,200 at 9% over 5 years
=1200 / (1 + 9%)^5

Result: 779.92

Common mistakes

Using FCF_n instead of FCF_n x (1 + g) in the perpetuity: the formula values next year's cash flow, so grow the final year once.
Discounting TV by (1 + WACC)^(n+1): the perpetuity formula already gives a value as of year n, so discount by n periods.
Growth rate above WACC or above long-run economic growth, which makes TV explode or turn negative.

Practice Terminal value

These drills check your answer on live data, free, no account needed.

Terminal value by perpetual growthValue the business with five forecast years plus a terminal value. Fill the discount factors (row 7), present values (row 8), the terminal value at year 5 using growth in B3 (B10: next year's cash flow divided by rate less growth), its present value (B11) and enterprise value (B12).
Terminal value by exit multipleValue the business assuming it is sold at the end of year 5 for the EBITDA multiple in B3. Fill the terminal value (B10), its present value (B11), the present value of the five cash flows using SUMPRODUCT (B12), enterprise value (B13) and the share of value that comes from the terminal value (B14).
Terminal value grid by rate and growthShow how sensitive the growth-based terminal value is. Fill B5:E8 with the final cash flow in B2 grown once by the growth rate in row 4, divided by the discount rate in column A less that growth rate.

Questions

Which terminal value method is better?

Bankers lean on exit multiples because they tie to market data; academics prefer perpetuity growth. Use both and show the implied growth or multiple of each as a check.

What share of a DCF is terminal value?

Usually 60% to 80%, sometimes more. A very high share means the result rests on the terminal assumptions, so sensitize WACC and g carefully.

Gordon growth modelThe Gordon growth formula: TV = cash flow x (1 + g) / (r - g). Examples with exact results, how to pick the growth rate and the implied exit multiple check.
Exit multipleThe exit multiple method sets terminal value as final year EBITDA times a market multiple. Worked example, present value at WACC and the implied growth check.
DCF model stepsThe six steps of a DCF: forecast unlevered free cash flow, set WACC, compute terminal value, discount it all, bridge to equity value and divide by shares.
Discount factorA discount factor converts a future cash flow into present value: DF = 1 / (1 + r)^t. Worked examples, the Excel formula with absolute references, mid-year.