Terminal Value in DCF: The Part That Drives Most Valuations
Terminal value explained: why it matters in DCF valuation, common approaches, and how investors keep terminal assumptions conservative.
What is terminal value?
In many DCF models, terminal value represents the value of the business after the explicit forecast period. It often drives the majority of the valuation.
Two common approaches
- Perpetuity growth (stable long-term growth)
- Exit multiple (e.g., EV/EBITDA multiple at year N)
It’s easy to make any stock look cheap by using aggressive terminal growth or exit multiples. Conservative assumptions protect you.
Learn DCF the right way
Use DCF as one method, then cross-check with other valuation lenses.
FAQs
Why is terminal value so important?▼
Because most of a company’s lifetime cash flows occur after the explicit forecast period. Small terminal assumptions can change value a lot.
Is exit multiple terminal value “better”?▼
Not necessarily. It can anchor to market reality, but it still embeds assumptions about what the market will pay later.
Related
Intrinsic Investor is for education and research only. Not financial advice.