Hi all - can someone kindly explain what is a terminal value? I am having a hard time understanding it.
Lostone
Terminal value is residual value which remains after exploiting all expected cash flow streams generated from asset or company as a whole. It can be related with liquidation value but it must not in any case.
It should be discounted to PV as each other cf streams.
For example, consider an asset (financial or what else) which supposed to bring you 10 K in first, 8K in second and 5 k in third year from now. After 3rd year from now, you have optinion to sell the asset for 1K which is its terminal value. Another approach does not consider a liquidation of asset than further constant term growth (after 3rd year in this example).
Think of it as the value beyond the scope of your estimate, i.e. you estimated cash flows up to a certain point in time and after that your best estimate is that the company will be worth X without much further complications.
Think about it this way - you could discount a stream of cashflows of a going concern for ‘n’ number of years, say 100. Or you could discount for 10 years, and then have a terminal value that captures the present value from discounting cashflows from year 11 to year 100 back to year 10.
You can then take Yr 1-10 cashflows plus the terminal value and discount them all back to present time (Yr 0) to get an intrinsic value as of today.