In finance, the terminal value (also known as “continuing value” or “horizon value” or "TV") of a security is the present value at a future point in time of all future cash flows when we expect stable growth rate forever. It is most often used in multi-stage discounted cash flow analysis, and allows for the limitation of cash flow projections to a several-year period; see Forecast period (finance).
Forecasting results beyond such a period is impractical and exposes such projections to a variety of risks limiting their validity, primarily the great uncertainty involved in predicting industry and macroeconomic conditions beyond a few years.
Thus, the terminal value allows for the inclusion of the value of future cash flows occurring beyond a several-year projection period while satisfactorily mitigating many of the problems of valuing such cash flows.
The terminal value is calculated in accordance with a stream of projected future free cash flows in discounted cash flow analysis.
For whole-company valuation purposes, there are two methodologies used to calculate the Terminal Value.
See also
- Intrinsic Value
- Asset retirement obligation
- Business valuation
- Cost of capital
- Net present value
- PVGO
- Terminal value (accounting)
External links
- Closure in Valuation: Estimating Terminal Value, Prof. Aswath Damodaran, Stern School of Business
- Terminal Value (Columbia Business School Research Paper No. 18-12), Prof. Doron Nissim, Columbia Business School
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- Estimating Capital Expenditures and Depreciation Expense in the Direct Capitalization Method
- The comprehensive guide on How to Calculate Terminal Value
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