Terminal value

Terminal value captures everything beyond the explicit forecast horizon — typically years 11-and-beyond in a ten-year DCF. Two methods dominate. The Gordon growth method assumes the business grows free cash flow at a constant rate g into perpetuity and divides next-year cash flow by (r − g), where r is the discount rate. The exit-multiple method applies a steady-state EBITDA or earnings multiple to the final forecast year. Both approaches are sensitive: a terminal growth rate of 3% versus 2% can swing fair value by 20% or more, and an exit multiple chosen too generously bakes in valuation expansion that the explicit forecast does not justify. Terminal value typically accounts for 50–80% of total DCF value, which is why it is the single most consequential assumption in any model. We flag terminal-value concentration above 60% as a fragility signal that should trigger a longer explicit-forecast period (15 years instead of 10), an exit-multiple sanity check against the company's archetype-specific terminal P/E, and explicit communication of the terminal-value contribution in the reporting layer. Terminal growth should never exceed long-run nominal GDP growth (we cap at 2.5–3.0% for developed-market businesses); terminal P/E should be calibrated to the steady-state margin and growth profile, not the current trading multiple.