Fundamental analysis
Terminal value
Definition
The value, at the end of the forecast, of all the cash flows after it, usually estimated with a perpetual growth formula or an exit multiple.
Example
Say your forecast for company XYZ ends in year 5 with $50 million of free cash flow, assuming 2% perpetual growth and a 10% discount rate. The perpetual growth formula gives a terminal value of $50 million × 1.02 ÷ (0.10 − 0.02) = $637.5 million at the end of year 5. An exit multiple of 12 times year-5 cash flow gives $600 million, a reminder that both are assumptions.
Hypothetical numbers, for illustration only.
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