Terminal Value


N's spirit Basic MBA > Terminal Value

Terminal Value

When using DCF method, terminal value of final year should be clarified. There are three ways to estimate it as below.

Using DCF method
Estimating asset value directly
Using multiple like PER or EV/EBITDA



Estimating terminal value by DCF method

This method is used given the company will continue its business forever.

In case that business will be stable after final estimated year
Terminal Value
= FCF of final year / Discount Rate

In case that business will grow after final estimated year
Terminal Value
= FCF of final year / (Discount Rate - Growth Rate)

This method is used when estimating business value or corporate value.


Estimating asset value directly

This method is used given asset will be sold in final year

Terminal Value
= Net asset value in final year - Debt


This method used when estimating return of investment in a facility or a project.

Terminal value of a project can be calculated as;

Terminal Value of a project
= CAPEX - accumulated depreciation + increase of working capital.



Using multiple like PER or EV/EBITDA

PER
Net equity value of the final year = estimated net profit of the final year * PER

PER should be estimated by PER of similar company or historical PER of the company.

EV / EBITDA
Net equity value of the final year = estimated EBIT of the final year * EBITDA multiple + Cash - Debt

In real case, multiple is usually used in order to prove validity of terminal value by DCF method.


How to derive formula of terminal value by DCF method

Let's say cash flow of a project as below.

Terminal Value

In this case, if cash flow is stable after year 5, terminal value R is as follows.



If both sides are multiplied by (1+r), formula will be;



The differentiation between two formulas is;



Therefore, it is found that terminal value by DCF method can be calculated by FCF of next year of final year divided discount factor of final year.


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Finance
Principle of Finance
FCF (Free Cash Flow)
DCF (Discount Cash Flow)
WACC
Beta
Unlevered Beta
IRR
Terminal Value
Disadvantages of WACC
APV (Adjusted present value) Method
Making Portfolio and Diversification of Risk 1
Making Portfolio and Diversification of Risk 2
Return analysis by DCF 1
Return analysis by DCF 2
Important Indicator of DCF
Optimized Debt Equity Ratio
Tax Shield by Debt
Types of Debt
Policy of Dividend
Relationship between Policy of Dividend & Stock Price
Relationship between Own Shares Purchase & Stock Price
Investment to raise Stock Price
Bond
Coupon-Bearing Bond
Discount Bond
Bond with Warrant
Comparison of Yield Rate among Several Bonds
Securitization
Project Finance
M&A
Effect of M&A
Synergy Analysis
Financing in M&A
Process of Purchasing Stock Price in M&A
Types of Selling Business
Spinoff
Tracking Stock
Curve Out
LBO (Leveraged Buy Out)
MBO (Management Buy Out)
PPA (Purchase Price Allocation)
PMI (Post Merger Integration)


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N's spirit Basic MBA > Terminal Value

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