Angie · learn
Terminal method
How value beyond the horizon is set: Gordon growth, which assumes cash flow grows forever at a fixed rate, or a multiple applied to the final year.
Updated 2026-09-03
The terminal method is how value beyond the horizon is set. There are two, and the choice says something about what kind of business is being valued.
- Gordon growth assumes cash flow keeps growing forever at the perpetual growth rate. It suits a stable compounder whose business in twenty years will resemble today's, only larger.
- An exit multiple assumes the business is worth a fixed multiple of its final projected year. It suits a cyclical, because it refuses to extrapolate whatever point of the cycle the final year happens to land on. See exit fcf multiple.
Angie assigns the method by sector rather than by company. Energy, basic materials and consumer cyclicals get an exit multiple, at 8, 10 and 14 times respectively. Everything else uses Gordon growth. The reasoning is structural: an oil producer's final projected year is a point on a cycle, and treating it as a perpetual run-rate is a category error regardless of which producer it is.
See also
- Terminal value — Everything the business is worth beyond the projection horizon, set by Gordon growth or an exit multiple and then discounted back. It is usually the majority of the answer.
- Perpetual growth — The rate the company is assumed to grow at forever, once the explicit horizon ends. It feeds the Gordon-growth terminal value and cannot sensibly exceed the economy's long-run growth.
- Exit FCF multiple — The multiple applied to terminal-year free cash flow when the exit-multiple method is used instead of Gordon growth.
Educational content, not investment advice. Angie explains how a valuation is built so you can judge it yourself. What you do with that is your call.
