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.
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