1. What is Terminal Value?

Terminal Value represents the present value of all future cash flows of a business beyond the forecast period. It's a critical component in discounted cash flow (DCF) analysis for business valuation.

2. How Does the Calculator Work?

The calculator uses the Gordon Growth Model formula:

Where:

• \( FCF \) — Free Cash Flow ($)
• \( Growth \) — Perpetual growth rate (decimal)
• \( WACC \) — Weighted Average Cost of Capital (decimal)

Explanation: This formula assumes cash flows will grow at a constant rate forever, discounted back to present value using the company's cost of capital.

3. Importance of Terminal Value Calculation

Details: Terminal value often constitutes a significant portion (60-80%) of total company valuation in DCF models. Accurate estimation is crucial for investment decisions, mergers and acquisitions, and corporate financial planning.

4. Using the Calculator

Tips: Enter FCF in dollars, growth rate and WACC as decimals (e.g., 5% = 0.05). Ensure WACC is greater than the growth rate for valid results. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why must WACC be greater than growth rate?
A: If growth rate exceeds WACC, the denominator becomes negative, resulting in a negative terminal value which is not economically meaningful for a going concern.

Q2: What is a reasonable growth rate assumption?
A: Typically ranges from the risk-free rate to slightly above GDP growth (2-4%). It should not exceed the economy's long-term growth rate.

Q3: How is WACC calculated?
A: WACC = (E/V × Re) + (D/V × Rd × (1 - Tc)), where E is equity, D is debt, V is total value, Re is cost of equity, Rd is cost of debt, and Tc is tax rate.

Q4: Are there alternative terminal value methods?
A: Yes, including exit multiples method (using EBITDA multiples) and liquidation value method for businesses not expected to continue operating.

Q5: What are limitations of this model?
A: Assumes perpetual constant growth, which may not reflect reality. Sensitive to small changes in inputs, particularly growth rate and WACC.