It is important to get the terminal value estimate right because the terminal value accounts for a large part of firm value. The terminal value as a percentage of firm value could be anywhere from 50-80% and can be estimated using a number of ways.
You can estimate terminal value in a DCF valuation using any of these methods:
- Perpetual growth rate
- Multiples of earnings or revenues
- Orderly liquidation value; or
- Fire sale value
Advanced practitioners can also use the options method to arrive at a terminal value.