Terminal value calculation
Hi guys,
I would need some help please, with the calculation of Terminal Value..
Sounds pretty basic I know, but this got pretty confusing in an interview ..
Let's assume you project your FCFF over a period of 5 years,
in year 5 you have FCFF of 350 let's say, a WACC of 10% .. that gives you 350/ 1.1^5 for year 5 to add to the NPV ...
let's assume no growth, to make things simple .. IS TV equal to
a) [350] / 0.1 = 3500
b) [350/ 1.1^5] / 0.1
I always thought the right answer is a) (keep in mind i never studied this, I only read the vernimmen, Rosenbaum and some books and never had valuation classes or any finance classes for that matter) .. but during an interview I had, either the interviewer corrected me saying it was b), or he corrected me and I'm thinking he said b) .. all I understood was that a) was wrong..
Thank you guys very much for your help, I really need clarifications (and sorry if this sounds very basic, but I need straight answer from professionals .. Thanks in advance..
Have a great day
You would need to find the PV of the TV, so you need to discount back 5 periods
Ok thanks .. so does that mean that b) is mathematically right, and for it to be financially right we would have
TV = [ 350 / 0.1 ] / 1.1^5 ???
Thanks a lot!
TV would equal to CF (1+g) / (r-g) so since growth is 0 it would be CF / r. However, that is the TV in year 5, so you would have to discount it back to get the PV.
Your TV would be a. But you need the PV of your TV to calculate your EV. Which b) is correct since 3500/(1+.1)^5
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