Finance Report: Terminal Value Analysis and Valuation Methods

This report provides an analysis of terminal value, a crucial concept in financial valuation, particularly when projecting cash flows beyond a specific period. The report discusses the two primary models for calculating terminal value: the perpetual growth model and the exit multiple model. The perpetual growth model assumes a business's ability to generate free cash flows indefinitely, while the exit multiple model uses trading multiples to estimate the value. The report includes a practical example demonstrating the calculation of terminal value and the overall valuation of a firm, considering free cash flows, the present value of terminal value, and the firm's debt to determine the equity value per share. The report highlights the importance of these valuation techniques in making informed financial decisions. The report also presents the calculation of the per share value of the company.

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

2TERMINAL VALUE
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

3TERMINAL VALUE
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.

4TERMINAL VALUE
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.