TERMINAL VALUE
THE TAIL THE WAGS THE
DOG?
Approaches for estimating terminal value

If you are doing an intrinsic valuation, which of the
following is never an appropriate way to estimate
terminal value?
Liquidation value
 Stable growth model (assume stable growth perpetuity)
 A growing annuity (say 30 years after your terminal year)
 Exit multiple

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Terminal value: No growth

You are estimating the terminal value for a firm with
$ 100 million in after-tax operating income (and
after-tax cash flow) with no growth expected in
perpetuity. It has a cost of capital of 10%. Estimate
the terminal value.
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Terminal Value: With growth
Now assume that you expect the firm to generate 2%
in growth rate forever. What will happen to the
terminal value?
a. It will go up
b. It will go down
c. It will not change
d. None of the above
e. Any of the above
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