You might use numbers such as 1%, 2%, or 3%, depending on the region. Terminal Value = Final Year UFCF * (1 + Terminal UFCF Growth Rate) / (WACC – Terminal UFCF Growth Rate)Īs shown in the slide above, this “Terminal Growth Rate” should be low – below the long-term GDP growth rate of the country, especially in developed countries such as Australia, the U.S., and the U.K. You rarely forecast the actual Terminal Period in a DCF, so you often project just the Unlevered FCF in Year 1 of the Terminal Period and use this tweaked formula instead: Terminal Value = Unlevered FCF in Year 1 of Terminal Period / (WACC – Terminal UFCF Growth Rate) In an Unlevered DCF, this all-important formula becomes:
So, it’s not quite as easy as just looking at a DCF and inputting all the numbers straight from there. Put simply, this “Company Value” is the Terminal Value!īut to calculate it, you need to get the company’s first Cash Flow in the Terminal Period, and its Cash Flow Growth Rate and Discount Rate in that Terminal Period as well. Premium Course Signup What Terminal Value MeansĪs with the previous two lessons, everything here goes back to the big idea about valuation and the most important formula in finance:
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