There are different methods to estimate terminal value in a DCF valuation. The perpetual growth rate method is the most common approach. Other methods include a multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage the company and expected growth drivers as well as the information available. The perpetual growth rate method is the most common approach. However, the perpetual growth rate is usually assumed to be a positive value. Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not? We address this question: “Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not?” on this page:
There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, a multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage the company and expected growth drivers as well as the information available. Which method should you use to estimate terminal value in a DCF valuation?
There is no right answer. How do you check if you are on the right track? Why is this important? The terminal value as a percentage of firm value could be anywhere from 50-80% usually. The terminal value as a percentage of firm value could be lower or higher under specific conditions too. How can you check if your terminal assumptions are reasonable?
The terminal value as a percentage of firm value could be anywhere from 50-80% usually. The terminal value as a percentage of firm value could be lower or higher under specific conditions too. There is no right answer. How do you check if you are on the right track? Why is this important? What percentage of your total value does your terminal value usually represent?