Terminal Value

Terminal value is the single number a DCF uses to stand in for every year of cash flow after the forecast ends. The common version, the Gordon growth formula, takes the last forecast year's free cash flow, grows it one more year and divides by the discount rate minus a perpetual growth rate: TV = FCF x (1 + g) / (r - g).

Because it sits at the end of the forecast, it is discounted back like any other future cash flow, and it is usually the largest piece of the answer. Under the fair-value tool's defaults, a ten-year forecast at 8% growth with 2.5% terminal growth and a 9% discount rate, the terminal value supplies 60.2% of the total present value.

The formula breaks as the growth rate approaches the discount rate: the denominator shrinks toward zero and the value runs away, and at or above the discount rate the result means nothing, which is why our tool refuses to compute in that case. Smaller changes still matter. In the same example, 2.0% terminal growth instead of 2.5% cuts the value per share from 238.90 USD to 227.98 USD, and 3.0% raises it to 251.64 USD.