How do you calculate terminal value?

Answer hidden.


You can either use the Multiples Method or the Gordon Growth method (perpetuity growth method)

Gordon Growth Method:
Terminal Value = Final Year Free Cash Flow * (1 + Growth Rate) / (Discount Rate - Growth Rate)

Multiples Method:
Terminal Value = Financial metric (i.e. EBITDA) x Trading multiple (i.e. 10x)

In both cases, we’re estimating the same thing: the present value of the company’s Free Cash Flows from the final year into infinity, as of the final year.