How do you generally calculate terminal value in a DCF model?

To determine terminal value in a Discounted Cash Flow (DCF) model, a common approach involves applying an equity value-based multiple and discounting it. This method captures the value of a company beyond the explicit forecast period, based on expected future performance.

The equity value-based multiple is often derived from comparable company analysis or precedent transactions, reflecting how the market values similar businesses. By applying this multiple to a projected metric, such as earnings or free cash flow at the end of the forecast period, you can estimate the terminal value. Subsequently, this value is discounted back to present value using the discount rate employed in the DCF model, allowing investors to assess the current worth of future cash flows.

This approach provides a structured way to account for the long-term growth potential of the business and is critical for accurately reflecting the company’s intrinsic value. The methodology aligns closely with the principles of valuation, especially in capturing the reality of how companies are valued in practice.