— Business & Valuation
Terminal Value Calculator
Calculate terminal value in a DCF using Gordon growth and exit multiple methods. Discount each to today, compare their implied assumptions, and see how much of total value comes from the terminal period.
Terminal value (Gordon growth)
$1,471
- PV of terminal value
- $914
- Exit-multiple terminal value
- $1,350
- PV (exit multiple)
- $838
- Cross-check
- Consistent
- Growth implied by the multiple
- 2.41%
- Multiple implied by the growth
- 9.81
- TV share of DCF value
- Typically 60–80%
Try: Gordon vs exit (consistent), Exit multiple headline, Inconsistent assumptions, Fading growth (H-model)
— The two methods, side by side
| Method | Key assumption | Terminal value | PV of TV | Implied cross-metric |
|---|---|---|---|---|
| Gordon growth | 3% perpetual growth | $1,471 | $914 | 9.81× implied |
| Exit multiple | 9× EV/EBITDA | $1,350 | $838 | 2.41% implied |
— The two methods, visualized
Download— How it works
Gordon growth: TVₙ = FCFₙ·(1 + g) ÷ (WACC − g). Exit multiple: TVₙ = terminal metric × exit multiple. PV of TV = TVₙ ÷ (1 + WACC)ⁿ. Implied growth from a multiple: g = (TV·WACC − FCFₙ) ÷ (TV + FCFₙ).
Two methods, and why you run both
There are two standard ways to estimate terminal value, and good practice is to compute both and see whether they agree. The Gordon-growth (perpetuity) method assumes the final year’s free cash flow grows at a constant modest rate forever, and capitalises it at the discount rate less that growth. The exit-multiple method instead assumes the business is sold at the end of the forecast for a market multiple of a terminal-year metric — typically EV/EBITDA. Each has a blind spot: Gordon growth is exquisitely sensitive to the growth and discount rates (the denominator is a small difference between two larger numbers), while the exit multiple imports today’s market sentiment into a point years away. Running them side by side, as this calculator does by default, is the cross-check that keeps either from going unchecked.
Worked example — FCF 100, g 3%, WACC 10%, n = 5; or 150 EBITDA × 9×: Gordon: 100 × 1.03 ÷ (0.10 − 0.03) = 103 ÷ 0.07 ≈ 1,471. Exit: 150 × 9 = 1,350. Discounted at 10% for 5 years, the PVs are ≈ 914 and ≈ 838 — close, so the assumptions agree.
The reconciliation that catches bad assumptions
The real power of running both methods is the implied cross-check. Every exit multiple secretly implies a perpetual growth rate, and every growth rate implies an exit multiple — so you can translate one into the other and see whether your two stories are the same story. If your 9× EV/EBITDA exit multiple implies 2.4% perpetual growth but your Gordon model assumes 3%, they’re consistent. If the multiple implies negative growth while your Gordon case assumes 6%, something is wrong — usually an exit multiple that’s too low for the growth you’re forecasting, or vice versa. The calculator computes both implied figures and flags a mismatch when they’re more than a percentage point apart, so you reconcile the assumptions before they distort the valuation.
Refinements, and a word of caution
A few options sharpen the estimate. The mid-year convention discounts the terminal value over n − 0.5 years, reflecting that cash arrives through the year rather than only on the last day — a small but standard uplift. Fade (the H-model) avoids the unrealistic “cliff” where growth drops from high to perpetual overnight; instead it declines linearly over a fade period, which better fits a maturing company. And switching the multiple basis — EV/EBIT, EV/Revenue or P/E — matches whatever your comparables are quoted on. The caution that matters most: because terminal value is the bulk of a DCF, small changes to growth or the discount rate move it a lot. Treat the perpetuity growth as no higher than long-run GDP growth, anchor the exit multiple to real comparables, and never let the terminal value rest on a single unchecked assumption. Educational tool only, not investment advice.
— Reader questions
What is terminal value in a DCF?
It’s the value of all the cash flows a business generates after the explicit forecast period ends. Because a forecast only runs a few years but the company keeps producing cash, the terminal value usually accounts for the majority — often 60–80% — of a DCF’s total value, which is why estimating it carefully matters so much.
Which is better, Gordon growth or exit multiple?
Neither is universally better — they have complementary weaknesses, so the best practice is to compute both and cross-check them. Gordon growth is very sensitive to the growth and discount rates; the exit multiple imports current market sentiment into a future point. When the two agree, you can be more confident; when they diverge, one of your assumptions needs revisiting.
What perpetual growth rate should I use?
A rate the company can plausibly sustain forever — which in practice means no higher than long-run nominal GDP growth, typically 2–4%. A perpetual growth rate above the discount rate is mathematically invalid (it implies infinite value), and one near it produces an unstable, exaggerated terminal value.
How do you cross-check the two methods?
By translating each into the other’s language: an exit multiple implies a perpetual growth rate (solve the Gordon formula backwards), and a growth rate implies an exit multiple (the Gordon terminal value divided by the terminal metric). If your exit multiple’s implied growth matches your Gordon growth assumption, the two are consistent; a large gap signals an inconsistency to resolve.
What is the mid-year convention?
An adjustment that discounts cash flows as if they arrive in the middle of each year rather than at year-end — so the terminal value is discounted over n − 0.5 years instead of n. It reflects that businesses generate cash throughout the year and slightly increases the present value.