Fundamental Glossary / Valuation Methods
Terminal Value
The value, at the end of the explicit forecast, of all cash flows after that date.
Formula
Perpetuity: next cash flow / (discount rate - growth). Exit multiple: a metric at the end of the forecast x a chosen multiple. Then discount the terminal value back to today.
What it means
Forecasts cannot be yearly forever. The terminal value stands in for every year after the explicit period. In many DCFs it is more than half of the total value, so it deserves more attention than the first two forecast years, not less.
Two methods are common. A perpetual growth model assumes cash flows grow at a steady rate. An exit multiple assumes the business could be sold at a peer multiple.
How to read it
The growth rate in a perpetuity cannot exceed the long-run growth of the economy the company lives in. A rate above that, held forever, makes the firm larger than the economy.
What to watch
If the explicit forecast ends in an unusually good or bad year, the terminal value locks that year in. Normalise the base year first. And check that the exit multiple and the perpetuity method give answers in the same neighbourhood.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.