Terminal value is the value of an investment at the time of its maturity. This value is decided, by considering current value, interest rate and stable growth rate.

Terminal

Value

Investors

An investment can be a Bond or an Asset. Formula for calculating Terminal Value :

TV=Principal / (1 + Interest Rate)^Time

Terminal

Value

1. The Perpetuity

Growth Model

2. Exit Approach

1. The Perpetuity Growth Model

Where, g = Perpetuity growth rate (at which FCFs are expected to grow) WACC= Weighted Average Cost of Capital

This model assumes that the company will continue its historic business and it generates FCF’s at a steady state.

In this method Terminal Value is calculated as:

Terminal = Final Projected Free Cash Flow *(1+g)/ (WACC-g) Value

2. Exit Approach

This is another way of determining terminal value of cash flows by using a multiplier of some income or cash flow measure such as net income, NOPAT, EBITDA.

Example: If you invest $20 and after specific time period if you sell this investment for $100, then this is an Exit multiple of 5x. Following is the formula used:

Terminal Value= EBITDAn * Exit Multiple Where n= terminal year of the projection period

While dealing with terminal value we should understand: • It is based on forecasting, so in future there

can be fluctuations in real time values which may cause increase or decrease in actual terminal value.

• Hence one cannot simply rely on it completely.

CONCLUSION

Knowledge is like a line with no ends…

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