Terminal value

[Jolie]

While calculating terminal value, don’t we have to multiply the last cash flow by (1+g) (g being the perpetual growth rate)?

(I came across an example where they have just taken the last cash flow and divided it by r-g, where they’ve used the perpetual growth rate! I’m confused now!)

[maple_frog]

@Jolie

While calculating terminal value, don’t we have to multiply the last cash flow by (1+g) (g being the perpetual growth rate)?

(I came across an example where they have just taken the last cash flow and divided it by r-g, where they’ve used the perpetual growth rate! I’m confused now!)

You should post more details on the problem!

[Jolie]

This is on free cash flows terminal value

[PierreCFA]

Your posts really waste our time to read.

If you have no time to write correctly the question. We have no time to answer you.

[Jolie]

1. The subject reads ‘terminal value’ which makes it abundantly clear I’m asking about terminal value calculation.

2. terminal value = d(n)*(1+g)/r-g

3. I’m questioning here if g in the denominator has been taken as the long term growth rate given in the example, the numerator should also be having 1+g=perpetual growth rate, which it is not.

Also, without being able to post a screenshot, there’s very little one can do to explain an example.

[maple_frog]

@Jolie

1. The subject reads ‘terminal value’ which makes it abundantly clear I’m asking about terminal value calculation.

2. terminal value = d(n)*(1+g)/r-g

3. I’m questioning here if g in the denominator has been taken as the long term growth rate given in the example, the numerator should also be having 1+g=perpetual growth rate, which it is not.

Also, without being able to post a screenshot, there’s very little one can do to explain an example.

What we are trying to say is that whether or not you should include the 1+g in the numerator depends on the circumstances of the question. If it’s from the curriculum or something, you could at least provide the reference. If not, you could take the time to write it down.

[Harrogath]

AF is not faceboook!

[Harrogath]

@Jolie

1. The subject reads ‘terminal value’ which makes it abundantly clear I’m asking about terminal value calculation.

Increase your efforts in your questions, so people can help you. As Pierre said above, you just commenting something on facebook, so just expect a random comment in return.

@Jolie

2. terminal value = d(n)*(1+g)/r-g

3. I’m questioning here if g in the denominator has been taken as the long term growth rate given in the example, the numerator should also be having 1+g=perpetual growth rate, which it is not.

Also, without being able to post a screenshot, there’s very little one can do to explain an example.

About your question. When modeling the future, cash flows can present behavior stages. For example, the year 1 to 5, revenues/cash flows (or whatever the question provides) will increase by 10% annualy, the high-growth stage. For the year 6 - 10, those variables will grow at just 7%, develop stage; and 4% thereafter (consolidation stage).

In the last stage, as you see, the long-term growth rate is provided. So, by the time you calculated CF(10), you can calculate the terminal value (present value of an infinite stream of cash flows).

Terminal value in this case is CF(11) / r-g

Since CF(11) is CF(10)x1.04, then the general formula for terminal value is just:

TV = FC(t)x(1+g) / r-g

Hope this helps!