Now that we understand what terminal value represents, this chapter takes the next step: calculating it. The method being used is the Gordon Growth Model, which assumes the company continues to generate cash flows indefinitely, growing at a constant rate.

To calculate terminal value, we project one more year of cash flow—just beyond the explicit forecast—and apply the formula:

$\text{Terminal Value} = \frac{FCF_{n+1}}{WACC - g}$

This formula gives us the value of all future cash flows after the forecast period, discounted back to the final year of projection. It's elegant, but deceptively sensitive.

Small changes in the growth rate (g) or the WACC can lead to large swings in terminal value. That's why it's important to choose conservative, well-justified inputs—especially for mature companies. Using an overly aggressive growth rate could overstate the business's long-term prospects, while underestimating WACC could inflate value unfairly.

Once you calculate the terminal value, remember: it's still in the future. Just like annual cash flows, it must be discounted to the present day using WACC. Skipping this step would artificially boost the company's value.

This calculation often accounts for 50–80% of a DCF's total valuation. That makes it crucial to get right—not just mathematically, but conceptually. The model assumes stability, so it's not ideal for companies facing disruption or volatility.

Terminal value is where the math meets the long-term story of the business. And in valuation, how you write the final chapter often determines the outcome of the whole book.