Terminal Value
The value of a business beyond the explicit forecast period in a DCF, estimated either via a perpetuity growth rate or an exit multiple. Often represents the majority of total implied enterprise value — a common point of scrutiny.
Why Terminal Value matters in interviews
Terminal value is usually the majority of a DCF, so an interviewer asking about it is asking whether you know your valuation rests mostly on an assumption about the distant future. Candidates who can sanity-check terminal value against the other method stand out immediately.
How it works in practice
Perpetuity growth (Gordon growth) method: TV = final-year FCF x (1 + g) / (WACC − g). With $500m of final-year FCF, 2.5% growth and a 9% WACC, TV = $512.5m / 0.065 = $7.88bn.
Exit multiple method: TV = final-year EBITDA x a terminal EV/EBITDA multiple, usually anchored on where comparable companies trade today.
Best practice is to calculate both and cross-check. Back out the implied perpetuity growth rate from your exit multiple: if it comes to 5%, the multiple is too high and you should say so.
Whichever method you use, the resulting terminal value sits at the end of the forecast and must itself be discounted back to present value.
What candidates get wrong
- Forgetting to discount terminal value back to today — an easy slip that inflates the valuation by 40% or more.
- Using a growth rate above long-run nominal GDP. Above roughly 3% the maths implies the company eventually consumes the whole economy.
- Applying the exit multiple to the wrong year's EBITDA, or mixing a forward multiple with a trailing metric.
Terminal Value: frequently asked questions
Which terminal value method is better?
Neither dominates. The perpetuity growth method is theoretically cleaner but very sensitive to the spread between WACC and g. The exit multiple method is grounded in observable market pricing but imports today's market sentiment into a long-run assumption. Practitioners compute both and use each to sanity-check the other.
What terminal growth rate should you use?
Typically 2-3% for a developed-market business — broadly long-run inflation plus modest real growth, and never above long-run nominal GDP growth. A mature business in structural decline may warrant 0% or negative.
Go deeper
This term comes up constantly in valuation interviews and on the desk.
DCF interview questions guideRelated Valuation terms
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