How it is worked out
Usually the last year's cash flow grown at a small steady rate, divided by the rate less that growth, brought back to today's value.
How to read it
- In many DCFs it is more than half the total value, so its assumptions matter more than any other.
- A long-run growth rate cannot sensibly beat the economy's growth for ever.
Example
$100m of cash flow in year ten, 2% growth, an 8% rate: a terminal value of about $1.7bn in that year (102 divided by 0.06).