What percentage of Enterprise Value is typically contributed by Terminal Value in a mature DCF, indicating overreliance?

What percentage of Enterprise Value is typically contributed by Terminal Value in a mature DCF, indicating overreliance?

• A. Less than 30%
• B. Between 40% and 50%
• C. More than 50%
• D. Exactly 50%

Answer: (C)

The main idea is that in a DCF, Enterprise Value equals the present value of the explicit forecasted cash flows plus the present value of the Terminal Value that represents all cash flows after the forecast horizon. For a mature company, the explicit forecast is relatively short and cash flows tend to be stable, so the perpetuity tail drives most of the value. That tail, even when discounted, often contributes more than half of the total Enterprise Value. Because it rests on the long-run growth rate and discount rate, this portion makes the valuation highly sensitive to those long-term assumptions. So, it’s common for Terminal Value to account for over 50% of Enterprise Value, which is why this option is the best choice.

The main idea is that in a DCF, Enterprise Value equals the present value of the explicit forecasted cash flows plus the present value of the Terminal Value that represents all cash flows after the forecast horizon. For a mature company, the explicit forecast is relatively short and cash flows tend to be stable, so the perpetuity tail drives most of the value. That tail, even when discounted, often contributes more than half of the total Enterprise Value. Because it rests on the long-run growth rate and discount rate, this portion makes the valuation highly sensitive to those long-term assumptions. So, it’s common for Terminal Value to account for over 50% of Enterprise Value, which is why this option is the best choice.