Terminal value
The bit of a DCF that represents everything beyond the forecast horizon.
Since you cannot forecast forever, you assume the company settles into steady growth after year ten and capitalise it with a perpetuity formula.
The formula divides by (discount rate − growth rate), so as the assumed perpetual growth rate approaches the discount rate, the valuation approaches infinity. A terminal growth rate above about 3% implies the company will eventually be larger than the world economy, which is why it is almost always wrong.
Terminal value = final year cash × (1 + g) ÷ (r − g)The order matters more than the maths
Cheapness is the last question. Ask it first and you produce a list of companies the market has given up on, and it is usually right.
It is where most of a DCF's value lives, and where most of its nonsense hides.
Nudging the terminal growth rate up to make a valuation work. The maths will happily oblige you.
Related terms
See Terminal value on a real company
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