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

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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

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

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
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Mar 27, 2021 - 10:31am

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

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