TERMINAL VALUE.

Hi Class, Check out Table 9.1 in our book to see a "discounted cash flow" example. This is a "full" example that we can use to put everything together, so to speak. In this example, pro forma financial statements were created so that it was possible to estimate periodic free cash flows. Periodic free cash flows are then discounted using the weighted average cost of capital. Finally, a "terminal" value is solved for using a constant-growth perpetuity formula. This is pretty amazing stuff, when you think about it. If we do this for an organization, we can solve for how much it is worth. In fact, this approach is what is used to value corporate purchases, mergers, and acquisitions. I know, how cool is that? Suppose you don't want to buy an entire firm, rather you just want to invest in its stock. This approach can also be used to value a firm's stock. Think about it, if we know the value of a firm, and if we subtract out the amount of that firm's debt, we are left with its equ

Running head: TERMINAL VALUE
Terminal Value
Name of the Student
Name of the University
Author Note

1TERMINAL VALUE
Table of Contents
Terminal Value............................................................................................................................2
Answer to Question 3...................................................................................................................2
Answer to Question 4...................................................................................................................2
References....................................................................................................................................4

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Terminal Value
Terminal value is the expected value measured beyond the explicit forecast period of a
business. There are two models of measuring the terminal value of a business. They are the
perpetual growth model and the exit multiple model. In case of most businesses, the forecast of
the financials is made for a period ranging from three to five years. This is considered reasonable
by most of the analysts. This is longer in case of businesses like mining, gas and oil. Beyond the
forecast period, there are no reasonable estimates of valuing a business. In situations like these,
the concept of terminal value comes handy. The perpetual growth model of calculating terminal
value assumes that a business will carry on forever and generate free cash flows in a normal
manner. The free cash flows are calculated by adding back the depreciation and reducing the
changes in working capital and capital expenditure from the earnings after tax (Vlaović-Begović,
Momčilović & Jovin, 2013). Whereas, the multiple exit manner assumes that the business will
be sold after sometime to other parties on the basis of a metric (PAT, EBIT etc.) multiplied with
trading multiples observed during the current business trends.
Answer to Question 3
In the given example, it is mentioned that the present value of the free cash flows is
arrived to be $6677 million. The terminal value of the firm after applying the perpetual growth
model is $33967 million. The present value of the terminal value at 9% WACC is $24697
million. After adding the present values of free cash flows and terminal value, the total value of
the firm is arrived to be $31374 million.
Answer to Question 4
The total debt of the firm is $2764 million. It is deducted from the total value of the firm
to arrive at the value of equity. The value of equity is $28610 million. The number of

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outstanding shares is 378 million. The number of outstanding shares divides the value of equity
to know the firm’s stock value on a per share basis. The value is $75.69 per share.

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References
Vlaović-Begović, S., Momčilović, M., & Jovin, S. (2013). Advantages and limitations of the
discounted cash flow to firm valuation. Škola biznisa, (1), 38-47.