Work out the terminal (continuing) value for a discounted cash flow model. Use the perpetuity growth formula, an exit multiple, or both side by side, then see the present value of the terminal value, the implied multiple or growth rate, its share of enterprise value and a sensitivity grid.
Last updated:
Method
Discounting
%
yrs
Number of explicit forecast years
Perpetuity growth inputs
$
Unlevered FCF of year N
%
Usually near long-run inflation / GDP growth (about 2%–3%)
Exit multiple inputs
$
Or the metric your multiple uses
×
EV/EBITDA from comparable companies
Optional
$
Sum of discounted FCF for years 1 to N, to get enterprise value
Enter your values to see the result.
Advertisement
Advertisement
How to use the Terminal Value Calculator
Pick a method: perpetuity growth, exit multiple, or both to cross-check.
Enter the discount rate (WACC) and the number of forecast years N.
For perpetuity growth, enter year-N free cash flow and a long-term growth rate below the WACC.
For the exit multiple, enter year-N EBITDA and a multiple from comparable companies.
Optionally add the PV of forecast cash flows and press Calculate terminal value to see enterprise value and the sensitivity tables.
Implied exit multiple = perpetuity TV ÷ EBITDAN; implied growth g = (TV × r − FCFN) ÷ (TV + FCFN)
Enterprise value = PV of forecast free cash flows + PV(TV)
Worked example: year-5 free cash flow of $1,200,000, 2.5% growth and a 9% WACC give TV = $1,230,000 ÷ 6.5% = $18,923,077. Discounted five years, PV = $18,923,077 ÷ 1.095 ≈ $12,298,700. With year-5 EBITDA of $2,000,000, that perpetuity value implies an exit multiple of about 9.5×.
How sensitive is terminal value?
Present value of the terminal value for $1,000,000 of final-year FCF, discounted 5 years:
WACC
g = 2%
g = 2.5%
g = 3%
8%
$11.57M
$12.68M
$14.02M
9%
$9.47M
$10.25M
$11.16M
10%
$7.92M
$8.49M
$9.14M
12%
$5.79M
$6.12M
$6.49M
A one-point change in WACC moves the value far more than a half-point change in growth, which is why both assumptions should be stress-tested.
Tips
Use a normalized final-year cash flow: capital spending should roughly match depreciation plus what growth requires, and margins should be sustainable.
Match the cash flow to the discount rate: unlevered FCF with WACC gives enterprise value; levered FCF with the cost of equity gives equity value.
If you use the mid-year convention for forecast cash flows, apply it consistently to the perpetuity terminal value; an exit-multiple value is usually kept at year end because it represents a sale price.
Cross-check: an implied perpetual growth above about 4% or an implied multiple far from peer trading multiples suggests an inconsistent assumption.
Frequently asked questions
What is terminal value?
Terminal value (TV), also called continuing value, is the value of all cash flows after the explicit forecast period of a DCF model, expressed as a single amount at the end of the final forecast year. Because it covers every year beyond the forecast, it is often the largest part of a company valuation.
What is the perpetuity growth formula for terminal value?
TV = FCF × (1 + g) ÷ (r − g), where FCF is free cash flow in the final forecast year, g is the long-term growth rate and r is the discount rate (WACC). For example, $1.2 million of FCF growing at 2.5% with a 9% WACC gives 1,230,000 ÷ 0.065 = about $18.92 million.
How do you calculate the present value of terminal value?
Discount it from the end of the forecast period: PV = TV ÷ (1 + r)^N. A $18.92 million terminal value at the end of year 5 with a 9% WACC is worth 18.92 ÷ 1.09^5 ≈ $12.30 million today. Add this to the PV of the forecast-year cash flows to get enterprise value.
Which is better: perpetuity growth or exit multiple?
The perpetuity growth method is grounded in cash-flow fundamentals, while the exit multiple method reflects what the market pays today for similar companies. Analysts often compute both and check that the implied exit multiple and implied growth rate are reasonable; a big gap signals that one set of assumptions needs another look.
What growth rate should I use for terminal value?
A terminal growth rate should be sustainable forever, so it is normally set near long-run inflation or nominal economic growth, commonly about 2% to 3% for mature companies in developed markets. It must be below the discount rate; a rate close to the WACC makes the value explode and is a red flag.
Why must the growth rate be lower than the discount rate?
The perpetuity formula divides by (r − g). If g equals r the denominator is zero, and if g is above r the series of future cash flows grows faster than it is discounted, so the sum has no finite value. Economically, no company can outgrow the whole economy forever.
What share of a DCF should terminal value be?
In many DCF models the present value of terminal value is roughly 60% to 80% of enterprise value, and more for young, fast-growing companies. A very high share means the valuation depends mostly on long-run assumptions, so test it with the sensitivity table.
Are all the tools on FreeToolCabin tested for quality and accuracy?
Yes! Every tool on our site undergoes automated Q/A testing in real browser environments to ensure high precision, correct output, and zero errors. If you happen to spot a bug or have a suggestion, please contact us at [email protected] and our team will review it right away.