This estimates a business’s value beyond forecast years, using sale multiples or perpetual growth, and is key for long-term projections in DCF valuation.
Terminal value is the estimated value of business beyond the projected timeline. It is very difficult to make right predictions for a longer period beyond 5 years and hence is the importance of terminal value.
Terminal value can be derived based on either of the two approaches.
Approach 1: It is expected that the business will be sold based on certain multiples.
Approach 2: The business will continue till eternity with a certain perpetual growth rate.
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