Terminal value

11 min read

Read firstBuilding a DCF. Valuation without accounting is memorization.

Most of a is not the forecast. In the model built in the last lesson, the five carefully argued forecast years produced 21.7% of the and one assumption about the indefinite future produced 78.3%. That ratio is typical, which is worth sitting with before you trust any DCF, including your own.

The two methods

Perpetuity growth, also called Gordon growth

TV_n = \frac{FCFF_n(1+g)}{WACC - g}

Terminal value at the end of year n is the final year's cash flow grown one more year, divided by the discount rate less the perpetual growth rate. It requires g to be below WACC.

Exit multiple

TV_n = EBITDA_n \times \text{Exit multiple}

Terminal value is the final forecast year's EBITDA times a multiple, usually taken from what comparable companies trade at today.

Both sit at the end of the final forecast year and both get discounted back the full number of years, including under the . That last detail is a common quiet error: applying mid-year discounting to the inflates the largest component of the valuation by half a year of the rate.

How fast it moves

Below is the same model with nothing changed except the . The stays at 7.5% throughout.

Perpetuity growth against the answer$ millions except the share price

	Terminal value	TV share of EV	Implied share price	Implied exit multiple
g = 1.0%	64,896	73.2%	$111.43	6.6x
g = 1.5%	70,652	74.9%	$120.23	7.2x
g = 2.0%	77,454	76.5%	$130.63	7.9x
g = 2.5%	85,617	78.3%	$143.12	8.8x
g = 3.0%	95,594	80.1%	$158.37	9.8x
g = 3.5%	108,066	82.0%	$177.44	11.1x
g = 4.0%	124,100	83.9%	$201.95	12.7x
g = 4.5%	145,480	86.0%	$234.64	14.9x

Read the last column, because it is the check nobody runs. At a 1.0% growth rate the model implies an of 6.6x. At 4.5% it implies 14.9x. The company currently trades near 9.7x. Any growth assumption whose implied multiple is far from where comparable businesses actually trade is making a claim you should be willing to state in words.

Test yourself

01What is a reasonable perpetuity growth rate and why?

Somewhere between long-run inflation and long-run nominal GDP growth, so roughly 2% to 4% for a US business. The ceiling is not a convention, it is arithmetic: a company growing faster than the economy forever eventually becomes the whole economy. If a model needs 5% to justify a price, the model is arguing that this business outgrows the country indefinitely, and that should be said out loud rather than left in a cell.

02Which terminal value method would you use?

Both, as a cross-check. Perpetuity growth is theoretically cleaner and its input is hard to have intuition about. Exit multiple feels grounded and imports today's market pricing into a date several years away, which is its own assumption. Calculate one, then back out what the other implies. If the perpetuity method implies a 20x exit multiple for a business trading at 10x, one of the two is wrong and you now know to look.

03Terminal value is 85% of your enterprise value. Is that a problem?

It is a signal rather than an error. Anything above roughly 80% means the explicit forecast is doing almost no work and the valuation is really a single perpetuity assumption dressed up. Two responses help: extend the forecast until the business reaches something like a steady state, which lowers the terminal share honestly, or present the answer as a range across terminal assumptions rather than as a number.

A tutor that knows this lesson. It asks before it explains, and it will not tell you what to do with your own money.

Every figure in this lesson that names a company comes from Target Corporation's Form 10-K for Fiscal 2025, the year ended 2026-01-31, filed 2026-03-11. Educational material, not investment advice.