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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.

Updated 2026-09-03

The terminal value is everything the business is worth after the explicit projection ends. A model that only counted five years would be valuing a company as if it shut down in year six, so the terminal value stands in for the entire remaining life of the business, collapsed into one figure and discounted back to today.

It is usually the majority of the answer. Across a live 68-name basket on 2026-09-05 the terminal value was 71 percent of enterprise value at the median, and never less than 48 percent. Anyone reading a DCF should know that most of what they are looking at came from this one calculation.

The two ways to set it

Gordon growth: TV = final-year FCF × (1 + g) ÷ (WACC − g)

Assumes cash flow grows forever at the perpetual growth rate. Used for stable compounders.

Exit multiple: TV = final-year FCF × multiple

Assumes the business is worth a fixed multiple of its final year. Used for cyclicals, so a good year at the top of the cycle is not extrapolated forever. See exit fcf multiple.

Why it needs guardrails

The Gordon formula divides by the gap between the discount rate and the perpetual growth rate, and as that gap narrows the result runs away. A telecom discounted at 5.1 percent with 3 percent perpetual growth implies a terminal worth 49 times its final year, which is not a claim anyone should make about a business in perpetuity.

  • The spread between wacc and perpetual growth is floored at 4 points, which caps the implied multiple near 25 times.
  • The terminal is separately capped at 25 times final-year free cash flow, roughly a 4 percent perpetual yield.
  • A company whose discount rate had to be floored gets a tighter cap of 18 times, because it should not receive the model's most generous assumption on a rate the model did not believe.
The terminal is where a DCF is most likely to be wrong, in either direction. A cap that is too tight amputates the value of a genuine wide-moat compounder; one that is too loose turns a levered utility into a false bargain. Angie has been wrong both ways and both fixes are in the code.

See also

  • 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.
  • 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.
  • WACC — Cost of equity and cost of debt blended by how much of each the company uses. This is the rate every future dollar is discounted at, and it is the single most leveraged input in the model.

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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.

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