How can Terminal Value be calculated?

How can Terminal Value be calculated?

• A. Only using Gordon Growth
• B. Through Multiples Method (exit multiple) or Gordon Growth formula
• C. By summing FCF
• D. Only using Multiples Method

Answer: (B)

Terminal value captures the value of all cash flows produced after the explicit forecast period in a DCF. There are two standard ways to estimate it: the Gordon Growth model, which assumes cash flows grow at a constant rate forever, and the multiples method, where you apply a market-based multiple (like an exit EBITDA or FCF multiple) to a forward metric to derive value. You wouldn’t get terminal value by simply summing a few years of forecasted FCF, because that covers only the near term, not the infinite tail beyond the forecast horizon. Since terminal value can be estimated either with the Gordon Growth approach or with an exit multiple, the best answer reflects both methods.

Terminal value captures the value of all cash flows produced after the explicit forecast period in a DCF. There are two standard ways to estimate it: the Gordon Growth model, which assumes cash flows grow at a constant rate forever, and the multiples method, where you apply a market-based multiple (like an exit EBITDA or FCF multiple) to a forward metric to derive value. You wouldn’t get terminal value by simply summing a few years of forecasted FCF, because that covers only the near term, not the infinite tail beyond the forecast horizon. Since terminal value can be estimated either with the Gordon Growth approach or with an exit multiple, the best answer reflects both methods.