Terminal Value calculation in a DCF
Hello Monkeys,
This is my first post and being used to read your high quality answers I am sure you will be able to bring me your lights
When we calculate the terminal value in a DCF we use:
(the last cash flow of our explicit horizon*g)/(WACC-g).
Then we have to discount this Terminal Value, and my question is: are we going to use the number of years of the explicit horizon or this number +1?
For example, we have a 5 year DCF. Do we discount the terminal value by 5 or 5+1=6?
Thank you for your answer
Your formula should be FCF*(1 + g) in the numerator
Thanks for your answer, I did a mistake, of course it's FCF*(1+g). My question was more about the number of years you use to discount your terminal value. Year 5 in a five year DCF or year 6 ?
It depends on when the TV was done.
If you do the TV in year five = Sixth Year FCF / (r - g)
Then you discount the TV in year five for five years.
Thanks a lot ;)
Yes, like the other poster said. By doing the 1 + g, you’re calculating the 6th year, terminal cash flow, and then discounting it back 5
You would discount the terminal value by 5 since you’d be calculating the terminal value at time 5. The formula for calculating any growing perpetuity at time 0 is FCF at time 1 divided by the growth into perpetuity (FCF*(1+g))/(WACC-g). In this case, since we’re calculating the perpetuity at time 5, we’d have to discount it to its present value by a factor of 5.
Adipisci veritatis fuga et aut odio. Voluptas nemo voluptatem similique. Est dolorem nesciunt dicta nulla nihil cumque debitis.
Occaecati nulla molestiae et fugiat cum reiciendis fugit. Quod sit aliquam amet voluptatem fugiat.
Iste harum voluptas qui voluptate qui perspiciatis. Dignissimos alias temporibus ipsum. Laboriosam et dolore ut vel eligendi.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...