Your question is Calculate Terminal Value in DCF. Take a moment with it on the right.
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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.
| Metric | Value |
|---|---|
| Year 5 free cash flow | $120,000,000 |
| WACC | 9.0% |
| Perpetual growth rate | 3.0% |
| Year 5 EBITDA | $150,000,000 |
| Exit EBITDA multiple | 10.0x |
| Net debt | $400,000,000 |
| Shares outstanding | 50,000,000 |
| Discount factor to present value (Year 5) | 0.650 |
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?