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

Comments (7)

  • Prospect in IB-M&A
Mar 27, 2021 - 10:17am

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 ?

Mar 27, 2021 - 10:24am
SquareMileMonkey, what's your opinion? Comment below:

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.

Array

  • 1
Mar 27, 2021 - 10:32am
TREBITDA, what's your opinion? Comment below:

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

Array

  • 1
Mar 27, 2021 - 10:31am
banana566, what's your opinion? Comment below:

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.

  • Prospect in IB-M&A
Mar 27, 2021 - 10:35am

Quia ducimus accusantium non magnam. Iste dicta saepe iusto asperiores corrupti. Dolorum libero delectus fuga dolor nostrum sequi. Libero dignissimos repellendus est animi architecto.

Start Discussion

Popular Content See all

Signing bonus taxed at 46%??
+278IBby Analyst 1 in IB-M&A
Dad has Cancer
+201IBby Intern in IB-M&A
What are Stanford's placements?
+124IBby Prospect in HF - Macro
Best IB Nicknames
+68IBby Analyst 1 in IB-M&A
Meritocracy
+59IBby Intern in IB - Gen
IB Rankings 2022
+55IBby monopolymatters
FTP vs Gugg?
+47IBby Intern in IB - Gen
Sellside / Buyside M&A Process "Checklist"
+41IBby Associate 1 in IB - Cov

Total Avg Compensation

May 2022 Investment Banking

  • Director/MD (9) $661
  • Vice President (36) $393
  • Associates (179) $247
  • 2nd Year Analyst (109) $161
  • 3rd+ Year Analyst (17) $156
  • 1st Year Analyst (348) $148
  • Intern/Summer Associate (73) $146
  • Intern/Summer Analyst (272) $91