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TVCore·11 min·10 checks

Terminal value

The three-quarters of your valuation you spent ten minutes on.

  • Finance
  • Financial analysis
  • Investing course
  • Economics
  • Certification

In a typical five-year DCF, terminal value is 60–80% of the answer. Analysts routinely spend days on the explicit forecast and minutes on the assumption that drives most of the result. Terminal value exists because a business does not stop generating cash in year six, and forecasting it individually forever is neither possible nor useful. So the tail is collapsed into a single number using one of two methods, and understanding why they disagree is more valuable than either number alone.

Take the courseFree. One attempt per check, saved as you answer.

What this course covers

  1. 01Check that the terminal year is a steady state
  2. 02Run the perpetuity growth method
  3. 03Run the exit multiple method
  4. 04Discount it back
  5. 05Reconcile the two methods

What you will be able to do

  • Perpetuity growth when the business will plausibly still exist in twenty years
  • Exit multiple when there is a credible, liquid peer set to draw the multiple from
  • Both, always, as a cross-check on each other
  • A longer explicit forecast instead, when growth has not normalised by year five

Where it does not apply

  • Perpetuity growth for a business with a finite life: a mine, a patent, a single-asset project
  • Exit multiple where the peer set is thin or the comparables are themselves mispriced
  • Either, applied to a terminal year that is not a steady state
  • Any terminal method at all, for a company whose survival past the forecast is genuinely in doubt

Predict it first

Not marked

The forecast horizon and every cash flow in it are unchanged. Only the assumption about what happens after year five is revised: growth into perpetuity is raised by three-quarters of a point.

ChangeTerminal growth: 2.25% → 3.00%

What happens to the value per share?
Commit to an answer before the model runs.

How this prepares you for the assessment

This is one of 17 courses, and none of them is required for the Verified Valuation Assessment. The credential is earned on two timed drills, graded by the same engine that checks this course, and the drill score decides what it says you are capable of, from Foundation through to Distinction.

  • Distinction90%+Works independently across all three core methods.
  • Merit75%+Builds the core models with limited supervision.
  • Pass60%+Understands the mechanics; works through a model with guidance.
  • FoundationcompletedKnows the vocabulary and the shape of each model.