Terminal value (TV)
Principles of Finance glossary · Valuation of Bonds & Stocks
Definition
In a two-stage DCF, the value of all cash flows beyond the explicit forecast horizon, computed via the Gordon-growth perpetuity TV = FCF_n+1 / (WACC - g) or via an exit multiple applied to a terminal-year metric. Typically accounts for 70%+ of total enterprise value, making the choice of g or exit multiple the largest source of valuation uncertainty.
Terminal value (TV) in plain English
When you value a company by forecasting its future cash, you can only realistically predict maybe 5-10 years out — after that it's a fog. The terminal value is a clever shortcut that bundles ALL the cash the company makes after that forecast into one number, either by assuming its cash grows at a steady slow rate forever (TV = FCF_n+1 / (WACC - g), where g is that growth rate) or by guessing what someone would pay for the business at the end. Here's the catch that makes it a big deal: this one 'everything after' number often makes up 70% or more of the company's whole value, so a tiny change in your guess for g swings the answer enormously. It's like valuing an apartment mostly on what you think it'll sell for in 10 years — get that guess wrong and the whole estimate wobbles.
Also called: TV
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