Corporate FinanceFinancial Glossary
Terminal Value
Definition
The estimated value of a business beyond the explicit forecast period in a DCF valuation. Since you cannot project cash flows indefinitely, terminal value captures all cash flows from the end of the forecast period to perpetuity, typically using either the Gordon Growth Model or an exit multiple approach.
Why It Matters
Terminal value often constitutes 60-80% of the total DCF valuation, making it the single most sensitive assumption. A small change in the terminal growth rate (say from 3% to 4%) can swing the valuation by 20-30%. This is why DCF valuations are only as reliable as the terminal value assumptions behind them.