Technical / Valuation
Terminal Value
Terminal value captures cash flows beyond the forecast period. Learn both methods, when to use each, and common interview traps.
"In the long run, we are all dead." — John Maynard Keynes
Concept
Terminal value is the present value of all cash flows beyond your explicit forecast period, captured as a single number at the end of year N. It exists because you can't forecast forever—so you either assume the business gets sold or continues as a perpetuity. It's the mathematical admission that most of a company's value lies in years you can't reasonably project.
Intuition
You're buying a business. You can forecast 5 years with reasonable confidence. But the business doesn't evaporate in Year 6—it keeps generating cash. Terminal value is your estimate of what those infinite future cash flows are worth, compressed into one number. The further out you look, the less confident you are, which is why the discount rate does heavy lifting. Think of it as the lump-sum buyout price for everything beyond your forecast horizon.
Components
Gordon Growth Method (Perpetuity Growth)
What It Is
Assumes the business generates cash flows forever, growing at a constant rate. The formula is derived from the sum of an infinite geometric series.
How to Calculate It
- Take final year FCF and grow it by to get year cash flow
- Divide by
Interview Script
Terminal Value represents the present value of all cash flows beyond your explicit forecast period, typically captured in Year 5 or Year 10. It exists because companies don't just disappear after your projection period—they either get sold or continue operating indefinitely, and you need to capture that remaining value as a single number. You calculate it using either a perpetuity growth method or an exit multiple, and it often represents 60-80% of total enterprise value, which is why getting the assumptions right matters enormously.