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Calculate Terminal Value in DCF

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Your question is Calculate Terminal Value in DCF. Take a moment with it on the right.

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Problem

Scenario

You are building a DCF for a mature payments business and your VP asks you to explain terminal value because it is driving most of the enterprise value. You have a 5-year forecast and need to estimate the value of cash flows beyond the explicit projection period. Assume USD reporting and that free cash flow in the final forecast year is a steady-state proxy. You need to show the math clearly and comment on how sensitive the result is to the long-term assumptions.

Financials

MetricValue
Year 5 free cash flow$120,000,000
WACC9.0%
Perpetual growth rate3.0%
Year 5 EBITDA$150,000,000
Exit EBITDA multiple10.0x
Net debt$400,000,000
Shares outstanding50,000,000
Discount factor to present value (Year 5)0.650

Question

What is terminal value, and how would you calculate it using the perpetuity growth method and the exit multiple method? Based on these inputs, what equity value per share do you get under each approach, and how would you discuss the sensitivity of the answer?

Key Inputs

WACC·9.0%Shares·50.0MNet debt·$400.0MYear 5 FCF·$120.0MExit multiple·10.0xYear 5 EBITDA·$150.0MDiscount factor·0.650Perpetual growth·3.0%

What This Tests

  • DCF terminal value mechanics
  • Enterprise value to equity value bridge
  • Expected-value thinking around long-dated cash flows
  • Risk assessment through sensitivity analysis