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DCF

Terminal value (Advanced)

By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching

5 min read · updated July 30, 2026

The basic version of this topic gives you two formulas. The level 4 and 5 questions never ask you to recite them. They ask you to make the two methods agree, and to defend the assumption you chose when they don't.

The cross-check is the real test

You have two ways to compute terminal value, and the interviewer's actual question is what happens when they disagree.

TVGordon=FCFn×(1+g)WACC−gTVExit=EBITDAn×Multiple\text{TV}_{\text{Gordon}} = \frac{\text{FCF}_n \times (1 + g)}{\text{WACC} - g} \qquad\qquad \text{TV}_{\text{Exit}} = \text{EBITDA}_n \times \text{Multiple}

The move that separates a strong candidate from a memorizer: each method is a check on the other. If you built terminal value off an exit multiple, back out the growth rate it implies. Rearranged:

gimplied=(WACC×TV)−FCFnTV+FCFnor, more usefullyMultipleimplied=TVGordonEBITDAng_{\text{implied}} = \frac{(\text{WACC} \times \text{TV}) - \text{FCF}_n}{\text{TV} + \text{FCF}_n} \qquad\text{or, more usefully}\qquad \text{Multiple}_{\text{implied}} = \frac{\text{TV}_{\text{Gordon}}}{\text{EBITDA}_n}

Note the rearrangement uses FCFn\text{FCF}_n, the terminal year cash flow, not FCFn+1\text{FCF}_{n+1}. The forward formula grows it by (1+g)(1+g), so FCFn+1\text{FCF}_{n+1} already contains the gg you are solving for — putting it here would be circular.

Run it on real numbers. Terminal year EBITDA of $500, a 10.0x exit multiple, so terminal value is $5,000. Terminal year unlevered FCF of $300, WACC of 9%. What growth rate does that $5,000 imply?

Solve 5,000=300×(1+g)0.09−g5{,}000 = \frac{300 \times (1+g)}{0.09 - g}. That gives 450−5,000g=300+300g450 - 5{,}000g = 300 + 300g, so g=150/5,300≈g = 150 / 5{,}300 \approx 2.8%.

That is a defensible answer, and saying so out loud is the point. Now change the exit multiple to 14.0x. Terminal value becomes $7,000, and the implied growth rate solves to g=(630−300)/7,300≈g = (630 - 300) / 7{,}300 \approx 4.5% — above long-run nominal GDP, which means the multiple is pricing in permanent outperformance of the entire economy. The multiple didn't look absurd. The growth rate it implied did.

Key insight

This is why bankers quote both. The exit multiple feels grounded because it comes from comps, but comps are a snapshot of today's market. Gordon Growth feels theoretical but enforces a real economic constraint. Using the multiple without checking the implied growth is how a DCF ends up defending a company that grows faster than its economy forever.

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Frequently asked

How do you check whether your terminal value is reasonable?
Cross-check the two methods against each other. If you built terminal value off an exit multiple, back out the perpetuity growth rate that multiple implies; if you used Gordon Growth, back out the implied exit multiple. When the exit multiple implies 5% perpetual growth or the growth rate implies a 30x multiple, one of your assumptions is wrong. Neither method is a check on itself.
What perpetuity growth rate should you use?
Something at or below long-run nominal GDP growth for the economy the company operates in, so typically 2% to 3% in developed markets. The logic is a constraint, not a preference: any company growing faster than the economy forever eventually becomes the entire economy. A rate above nominal GDP is the single most common way a DCF gets quietly broken.
Is it a problem if terminal value is 70% of enterprise value?
No, that is normal and expected. A five to ten year explicit forecast captures only a fraction of a going concern's life, so 60% to 80% of value sitting in terminal value is standard. It matters because it tells you where the sensitivity lives: your answer is driven more by the terminal assumptions than by the forecast you spent hours building.
Why does Gordon Growth use the terminal year cash flow grown one more period?
The formula prices a perpetuity that starts the year after your final forecast year. The numerator has to be the first cash flow of that perpetuity, which is the terminal year FCF grown by one year of growth. Using the un-grown terminal year FCF understates terminal value by roughly the growth rate.
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