# Terminal Value

Written by Fmi.Online Friday November 11, 2022
Terminal value is the sum of all cash flows from an investment or project beyond a forecast period based on a specified rate of return. In other words, it’s the estimated value of an asset at maturity adjusted for interest rates and cash flows in today’s dollars. This is important for the calculation of the expected future cash flows using the dividend cash flow valuation model.

#### Explanation :

The TV determines the value of a project at some future date when exact future cash flows cannot be estimated. Although there are various ways to calculate the terminal value, the most popular approach is the Gordon Growth Model. The GGM assumes that a company will continue to generate a stable growth forever and values a project in perpetuity. The model also assumes that the cash flows of the last projected year are stable and discounts them at weighted average cost of capital  to find the present value of the expected future cash flows.   To calculate this ratio using the GGM, we need to know:
• FCFF = free cash flow in the final year
• g = perpetuity growth
• WACC = discount rate
Therefore, the terminal value formula is calculated like this TV = FCFF x ( 1 + g ) / ( WACC – g )

#### In a nutshell :

• Terminal value (TV) determines a company's value into perpetuity beyond a set forecast period—usually five years.
• Analysts use the discounted cash flow model (DCF) to calculate the total value of a business. The forecast period and terminal value are both integral components of DCF.
• The two most common methods for calculating terminal value are perpetual growth (Gordon Growth Model) and exit multiple.
Our Courses are designed to boost your career

## Launch your career with Fmi’s Learning Pathway

Choose a learning pathway that best meets your needs and ambitions. Not sure which Fmi learning pathway is right for you? Explore our CareerBuddy videos for help and advice.

• 60+ hours
• 9 courses

Investment banking offers many exciting career opportunities for students. From Financial Analysts to Investment Management, and Sales & Trading to a wide range of roles in infrastructure such as IT, Risk or Compliance. This pathway is designed to help you understand the investment banking industry, the roles investment banks are recruiting for, and most importantly, help you to develop the practical skills you need to get into the industry and your preferred role whether this be as part of a school leaver, intern or graduate program.

55,000+ students currently enrolled
• 70+ hours
• 10 courses

Global markets provide a range of important products and services to corporates, institutions and governments worldwide from executing trades and managing risk to providing quality research content. A key business area in all investment banks, global markets offers a wide range of career paths for students to consider across all functions and at all levels from school leavers to internships through to graduate programs.

85,000+ students currently enrolled
• 50+ hours
• 8 courses

The asset management industry is a global industry worth over 100 trillion US dollars. It plays a crucial role in managing the assets of retail and institutional investors, offering a wide range of exciting careers in doing so. If you’re looking to forge a career in asset management, our Asset management pathway is perfect for you. We help you build the skills all asset managers are looking for and explore everything you need to know about the industry and the wide range of roles available in the sector

100,000+ students currently enrolled