Terminal value

The value assigned to everything beyond the explicit forecast period, most often by assuming the final forecast year's cash grows at a constant rate forever.

Example

Year five cash of 1,360,489 grown to 1,394,501 and divided by 0.075 gives 18,593,349 at the end of year five, worth 11,545,007 today.

Important

Compute what share of your total it represents and say the number out loud. At 72.5%, most of the valuation is a formula about a future nobody can see, and the conclusion should be reported that way.

Related terms

• Terminal growth rate — The rate at which cash flow is assumed to grow forever after the explicit forecast ends. Sits in the denominator of the terminal value formula alongside the discount rate.
• Gordon growth model — The relationship that values a growing perpetual income stream as next year's income divided by the required return less the growth rate. The same formula produces a terminal value and a capitalisation rate.
• Discounted cash flow — Valuing an asset as the money it will produce, with each future amount reduced to reflect that money arriving later is worth less than money arriving now.

Lessons that explain it

• Discounted cash flow: the method that shows its assumptions — A discounted cash flow states every assumption out loud, which is its great virtue and the reason it is so easy to abuse. The output moves enormously on inputs that cannot be observed. (14 min)

All 578 terms in the Investing glossary