From the course: Financial Modeling Foundations
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Terminal value in a valuation model
From the course: Financial Modeling Foundations
Terminal value in a valuation model
- [Instructor] Once you've built out cash flow projections in your DCF model, the next step is to go through and add your terminal value. Let's take a look at how that works. I'm in the 04_03_Begin Excel file. So we've gone through and we've used our three-statement model, and we've computed our free cash flow based on total cash for operations adjusted by our CapEx spending. So this gives us our free cash flows going forward. From here, we now need to figure out our terminal value. Our terminal value is a function of our free cash flow in the final year, our WAC, and our assumed growth rate. All right? The terminal value essentially mirrors the dividend discount model that you think about for valuing stocks. So the value is going to be equal to the next year's free cash flow divided by K minus g. And that next year's free cash flow, FCF1, is equal to FCF0 times 1 plus g. Okay? So we need to come up with our growth rate.…
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