How do you calculate terminal value in a DCF?

Q: What are the two methods for calculating terminal value?

The Gordon Growth Method uses the formula TV equals FCF times (1+g) divided by (WACC minus g), where g is a perpetual growth rate of typically 2-3%. The Exit Multiple Method uses TV equals final year EBITDA times an exit multiple derived from current trading comps. Both methods are typically cross-checked against each other to validate reasonableness.

Q: Why can the perpetual growth rate not exceed WACC in a terminal value calculation?

Mathematically, if the growth rate equals or exceeds WACC, the Gordon Growth formula produces an infinite or negative value. Practically, no single company can grow faster than the overall economy forever. A perpetual growth rate should approximate long-term GDP growth or inflation at 2-3%, reflecting that the company eventually matures into a steady-state business.

Q: How do you choose between the perpetuity growth and exit multiple methods?

The perpetuity growth method derives terminal value from cash flow fundamentals, assuming the business generates cash flows forever at a constant growth rate. The exit multiple method anchors terminal value to observable market data, since the multiple comes from current trading comps or precedent transactions. But the exit multiple carries circularity risk: you are using multiples to derive value in a DCF, when multiples are exactly what the DCF is meant to avoid. Use the exit multiple method as a sanity check on the perpetuity growth method, not a crutch.

Q: How do you discount terminal value back to the present?

Terminal value is calculated as of the final projection year, so it must be discounted back to today. You divide terminal value by (1 plus WACC) raised to the power of n, where n is the number of years in your forecast period. This present value of terminal value is then added to the present value of interim cash flows to get total enterprise value.

Terminal value captures cash flows beyond the forecast period. Learn both methods, when to use each, and common interview traps.

OFFERGOBLIN·4 min read·updated August 2026

On this page

Concept
Intuition
Components
Gordon growth method (perpetuity growth)
Exit multiple method
Choosing a perpetual growth rate
Discounting terminal value
Interview script

"In the long run, we are all dead." (John Maynard Keynes)

Concept

Terminal value is the present value of all cash flows beyond your explicit forecast period, captured as a single number at the end of year N. It exists because you can't forecast forever, so you either assume the business gets sold or continues as a perpetuity. It's the mathematical admission that most of a company's value lies in years you can't reasonably project.

Intuition

You're buying a business. You can forecast 5 years with reasonable confidence. But the business doesn't evaporate in Year 6. It keeps generating cash. Terminal value is your estimate of what those infinite future cash flows are worth, compressed into one number. The further out you look, the less confident you are, which is why the discount rate does heavy lifting. Think of it as the lump-sum buyout price for everything beyond your forecast horizon.

Components

Gordon growth method (perpetuity growth)

What it is

Assumes the business generates cash flows forever, growing at a constant rate. The formula is derived from the sum of an infinite geometric series.

How to calculate it

Take final year FCF and grow it by $(1 + g)$ to get year $n+1$ cash flow
Divide by $(\text{[WACC](/resources/wacc)} - g)$
This gives you terminal value as of year n, which still needs discounting

Example: FCF in Year 5 = $100M, WACC = 10%, g = 2.5%

\text{TV} = \frac{100 \times 1.025}{0.10 - 0.025} = \frac{102.5}{0.075} = \text{\textdollar}1,367M

Key consideration

The growth rate cannot exceed WACC: mathematically, the formula breaks (negative or infinite value). It also shouldn't exceed long-term GDP growth; no company grows faster than the economy forever.

Exit multiple method

What it is

Assumes the business is sold at the end of the projection period for a multiple of a financial metric: almost always EBITDA, sometimes revenue for high-growth companies.

How to calculate it

Take EBITDA in final projection year
Multiply by an appropriate exit multiple (derived from current trading comps or precedent transactions)
Result is enterprise value at exit, so discount it back to present

Example: Year 5 EBITDA = $150M, Exit Multiple = 8.0x

\text{TV} = 150 \times 8.0 = \text{\textdollar}1,200M

Key consideration

Circularity risk: you're using multiples to derive value in a DCF, but multiples are what you're trying to avoid by doing a DCF. Use this method as a sanity check, not a crutch.

Choosing a perpetual growth rate

What it is

The assumed annual growth rate of free cash flows into perpetuity. This is the most sensitive input in any DCF.

How to calculate it

Benchmark against:

Long-term GDP growth: 2-3% for developed economies. This is the ceiling: a perpetuity growth rate above long-run GDP growth means the company keeps taking a larger share of the economy every single year, forever, and eventually outgrows the economy itself. That's why the rate has to sit below it.
Long-term inflation: ~2% in the US, the usual floor for the band.
Industry maturity: Mature industries trend toward GDP; declining industries may warrant 0-1%

Textbook practice keeps the growth rate inside a 2-3% band: bounded below by long-run inflation and above by long-run nominal GDP growth. A rate outside that band needs a specific reason, like a genuinely declining industry.

Key consideration

A 0.5% change in growth rate can swing terminal value by 10-20%. Always sensitivity-test this input. If your model requires 4%+ perpetual growth to hit the target price, your thesis is probably broken. In the interview, what's actually being tested is whether you have a logical defense of what you're saying, more than whether you land on the exact right number.

Discounting terminal value

What it is

Terminal value is calculated as of the final projection year, not today. You must discount it back to present value.

How to calculate it

\text{PV of TV} = \frac{\text{TV}}{(1 + \text{WACC})^n}

Where $n$ = number of years in projection period.

Example: TV = $1,367M at Year 5, WACC = 10%

\text{PV of TV} = \frac{1,367}{(1.10)^5} = \frac{1,367}{1.611} = \text{\textdollar}848M

Key consideration

Forgetting to discount is a classic error. The terminal value sits at the end of Year 5: treat it like any other Year 5 cash flow.

Interview script

Terminal Value represents the present value of all cash flows beyond your explicit forecast period, typically captured in Year 5 or Year 10. It exists because companies don't just disappear after your projection period: they either get sold or continue operating indefinitely, and you need to capture that remaining value as a single number. You calculate it using either a perpetuity growth method or an exit multiple, and it often represents 60-80% of total enterprise value, which is why getting the assumptions right matters enormously.

unlockOFFERGOBLIN

create a free account to keep reading — 6 more sections. free forever. takes 30 seconds.

By continuing, you accept our Privacy Policy.

Frequently Asked Questions

What are the two methods for calculating terminal value?

Why can the perpetual growth rate not exceed WACC in a terminal value calculation?

How do you choose between the perpetuity growth and exit multiple methods?

How do you discount terminal value back to the present?

DCF Calculator
Discount projected free cash flow and a terminal value to an enterprise value.

All free calculators

Concept

Intuition

Frequently Asked Questions

Run the numbers

Components

Gordon growth method (perpetuity growth)

What it is

How to calculate it

Key consideration

Exit multiple method

What it is

How to calculate it

Key consideration

Choosing a perpetual growth rate

What it is

How to calculate it

Key consideration

Discounting terminal value

What it is

How to calculate it

Key consideration

Interview script