During a discounted cash flow analysis, what does the present value of terminal value typically represent?

In a discounted cash flow analysis, the present value of terminal value often represents a substantial portion of a company's total implied value—typically 50% or more. This is primarily because the terminal value accounts for the bulk of a company's value beyond the explicit forecast period of cash flows, usually extending indefinitely into the future.

The terminal value is calculated based on the assumption that the company will continue to generate cash flows at a stable rate after the forecast period. This results in a high present value, particularly for growing companies, as the projected cash flows in perpetuity can accumulate significantly. Given that DCF models often emphasize long-term growth prospects, the weight of the terminal value in the overall valuation becomes pronounced.

Understanding this concept is critical as it highlights the importance of estimating both future cash flows and the appropriate growth rate used in terminal value calculations. Thus, in many DCF analyses, the terminal value usually comprises the majority of the assessed value, underscoring its significance in investment appraisal.