PRACTICE · LEVEL 2 · ABOUT 10 MIN
Not triedRepair a broken terminal value
A model shows a terminal value using 10.0% perpetual growth at a 9.0% discount rate. Year-5 free cash flow is $50M and year-5 EBITDA $80M.
Explain why that terminal value is meaningless, then rebuild it at 3.0% growth.
Assumptions
- Gordon growth on NEXT year's cash flow: TV at end of year 5 = FCF₅ × (1 + g) ÷ (r − g).
- End-of-year discounting: the year-5 terminal value is discounted five full years.
Set 1 of 4