What does TV stand for in DCF valuation?

What does TV stand for in DCF valuation?

• A. Times Value
• B. Terminal Value
• C. Total Value
• D. Trade Value

Answer: (B)

Terminal Value represents the value of all cash flows created after the explicit forecast period in a DCF. When you project free cash flows for a finite span, you still need to account for the infinite tail of cash flows beyond that horizon. Terminal Value converts that perpetuity into a single present value, typically calculated using the Gordon growth model (assuming cash flows grow at a stable rate indefinitely) or an exit multiple approach. In the Gordon model form, TV = FCF in year n × (1 + g) / (WACC − g). This value is then discounted back to present value along with the explicit forecast cash flows. Terminal Value often makes up a large share of the total enterprise value, which is why it’s so important. The other terms listed aren’t standard terms for the tail value in a DCF.

Terminal Value represents the value of all cash flows created after the explicit forecast period in a DCF. When you project free cash flows for a finite span, you still need to account for the infinite tail of cash flows beyond that horizon. Terminal Value converts that perpetuity into a single present value, typically calculated using the Gordon growth model (assuming cash flows grow at a stable rate indefinitely) or an exit multiple approach. In the Gordon model form, TV = FCF in year n × (1 + g) / (WACC − g). This value is then discounted back to present value along with the explicit forecast cash flows. Terminal Value often makes up a large share of the total enterprise value, which is why it’s so important. The other terms listed aren’t standard terms for the tail value in a DCF.