What Does Terminal Value Mean?
The terminal value of a firm is its estimated value at a future point in time or at a point where projections of its cash flows would be too arbitrary to be reliable. This projected worth is used as a type of discounted cash flow (DCF) analysis.
To anticipate the value of something in the future (or its terminal value), all factors are taken into consideration. This includes current value, interest rates and projected growth.
Divestopedia Explains Terminal Value
Given the facts, a DCF analysis can predict a relatively accurate rate or worth of something five to 10 years in the future. Unfortunately, this value cannot be estimated for perpetuity and is stopped at a point where results begin to become impractical. However, to account for cash flows beyond that point in time, a value (known as terminal value) is assigned to them. This value represents what the firm will be worth beyond that particular point of time, or its projected worth at maturity.
The various methods to estimate a terminal value depend on the different assumptions made for each assessment. In some cases, the terminal multiple method is used. In this situation, an appropriate multiple is decided upon and is then applied to the statistics of the last projected year. Another model is the perpetuity growth method, where it is assumed that a business will maintain its previous business and value.