Terminal Value - Meaning, Formula, Example, Calculation in Excel
In this video on Terminal Value, we are going to learn this topic in detail including its formula, examples and calculation in Excel.
𝐖𝐡𝐚𝐭 𝐢𝐬 𝐓𝐞𝐫𝐦𝐢𝐧𝐚𝐥 𝐯𝐚𝐥𝐮𝐞?
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Terminal value is the value of a Firm’s expected FCF (Free Cash Flow) beyond the period of explicit projected financial model.
𝐓𝐞𝐫𝐦𝐢𝐧𝐚𝐥 𝐕𝐚𝐥𝐮𝐞 𝐅𝐨𝐫𝐦𝐮𝐥𝐚
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Below is the formula for Terminal value.
𝐓𝐞𝐫𝐦𝐢𝐧𝐚𝐥 𝐕𝐚𝐥𝐮𝐞 𝐅𝐨𝐫𝐦𝐮𝐥𝐚 = (𝐅𝐂𝐅𝐧 𝐱 (𝟏 + 𝐠)) / (𝐖𝐀𝐂𝐂 – 𝐠)
Here,
FCF = Free Cash Flow
g = perpetual growth rate of Free Cash Flow
WACC = Weighted Average Cost of Capital
𝟑 𝐓𝐲𝐩𝐞𝐬 𝐨𝐟 𝐓𝐞𝐫𝐦𝐢𝐧𝐚𝐥 𝐕𝐚𝐥𝐮𝐞 𝐅𝐨𝐫𝐦𝐮𝐥𝐚𝐬
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𝟭. 𝗣𝗲𝗿𝗽𝗲𝘁𝘂𝗶𝘁𝘆 𝗚𝗿𝗼𝘄𝘁𝗵 𝗺𝗼𝗱𝗲𝗹: This method is the preferred formula to calculate Terminal Value of the firm.
𝗧𝗲𝗿𝗺𝗶𝗻𝗮𝗹 𝗩𝗮𝗹𝘂𝗲 = 𝗙𝗖𝗙𝗙_𝟲 / (𝗪𝗔𝗖𝗖 - 𝗚𝗿𝗼𝘄𝘁𝗵 𝗥𝗮𝘁𝗲)
𝟮. 𝗡𝗼 𝗚𝗿𝗼𝘄𝘁𝗵 𝗣𝗲𝗿𝗽𝗲𝘁𝘂𝗶𝘁𝘆 𝗠𝗼𝗱𝗲𝗹: This formula assumes that the growth rate is zero!
𝗧𝗲𝗿𝗺𝗶𝗻𝗮𝗹 𝗩𝗮𝗹𝘂𝗲 = 𝗙𝗖𝗙𝗙_𝟲 / 𝗪𝗔𝗖𝗖
𝟯. 𝗘𝘅𝗶𝘁 𝗠𝘂𝗹𝘁𝗶𝗽𝗹𝗲 𝗠𝗲𝘁𝗵𝗼𝗱: This formula uses the underlying assumption that market multiple basis is a fair approach to value a Businesses.
𝗧𝗲𝗿𝗺𝗶𝗻𝗮𝗹 𝗩𝗮𝗹𝘂𝗲 = 𝗙𝗶𝗻𝗮𝗻𝗰𝗶𝗮𝗹 𝗠𝗲𝘁𝗿𝗶𝗰 𝘅 𝗧𝗿𝗮𝗱𝗶𝗻𝗴 𝗠𝘂𝗹𝘁𝗶𝗽𝗹𝗲
To know more about Terminal Value, you can go to this 𝐥𝐢𝐧𝐤 𝐡𝐞𝐫𝐞:- https://www.wallstreetmojo.com/Termin...
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