Practice Problem – Terminal Value in DCF

Practice Question

Cases in Finance
Valuation Tools
Growth Rate and Terminal Value
True or False

The terminal value in DCF analysis represents the cash flows beyond the projection period.

Answer +
TRUE
Explanation +

The terminal value is a critical component of the discounted cash flow (DCF) model. It captures the present value of all future cash flows expected beyond the explicit forecast period. Since it's not practical to forecast each year's cash flow indefinitely, the terminal value provides a single figure representing the ongoing value of the firm. This is often calculated using either the perpetuity growth method or an exit multiple.