A DCF valuation needs a terminal value representing everything beyond the explicit forecast period, assuming cash flow grows at a constant rate forever after.
How it works
The final forecast year’s free cash flow, grown one more year at the perpetual growth rate, is divided by the difference between the discount rate and that growth rate — the standard Gordon Growth (constant-growth perpetuity) formula.
What this does not include
This is the perpetuity-growth approach to terminal value — an alternative “exit multiple” approach (applying a valuation multiple to the final year’s metric instead) is a separate method not computed here, and the two can produce meaningfully different results.
How to use this calculator
- Enter the final forecast year’s free cash flow, the perpetual growth rate, and the discount rate.
Frequently asked questions
Why must the discount rate exceed the growth rate?
The perpetuity formula becomes undefined or negative if growth equals or exceeds the discount rate — a business can’t sustainably grow faster than its own discount rate forever in this model’s math.
How sensitive is terminal value to the growth rate assumption?
Very — small changes in the assumed perpetual growth rate can swing terminal value significantly, since the denominator is the (typically small) gap between discount rate and growth rate.
Does terminal value typically dominate a DCF valuation?
Often yes — for many businesses, terminal value represents the majority of total enterprise value in a DCF model, making the growth and discount rate assumptions especially consequential.
