Terminal value
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Search complete. 181 mentions across 13 episodes found for "Terminal value".
Oct 21, 2026
Aswath DamodaranHOST
So let's get to the matter at hand.
Aswath DamodaranHOST
Today we're going to complete our discussion of terminal value.
Aswath DamodaranHOST
And I'm going to ask you a couple of start of the class questions, kind of get the basis nailed down.
Aswath DamodaranHOST
And then we're going to go into what I call the loose ends in valuation.
Aswath DamodaranHOST
Essentially all the things you do after you tell me you're done.
Aswath DamodaranHOST
So let's start with a couple of questions about terminal value.
Aswath DamodaranHOST
Let's assume that I ask you to compute the terminal value for a company.
Aswath DamodaranHOST
The cash flows are going to be 100 million.
Aswath DamodaranHOST
When you think
speaker_4UNKNOWN
about terminal value, it's how we put closure on valuation.
speaker_4UNKNOWN
We stop after year five or seven
Aswath DamodaranHOST
because we're tired, we're exhausted, we don't want to do it anymore.
Aswath DamodaranHOST
We put a number and say that's the value of the company at the end of five or seven years.
Aswath DamodaranHOST
So that's what the terminal value is there for, is to allow you to finish your valuation because without a terminal value, you'd be doing this in perpetuity, just estimating cash flows year after year, a spreadsheet, as I said, that never ends.
Aswath DamodaranHOST
So let's think about ways of estimating the terminal value.
Aswath DamodaranHOST
There are three ways in which you will see people estimating terminal value, and one of these ways should never be used, but it gets used all the time.
Aswath DamodaranHOST
Even a company like Coca-Cola and Kraft Heinz, you know the under- underlying economics are changing.
Aswath DamodaranHOST
So, you keep the sustainable growth equations in mind because they will come in useful when we get to steady state, which in our DCF is going to be terminal value.
Aswath DamodaranHOST
But when you're projecting out growth for the next 10 years, it's a, it's not a great indicator for future growth.
Aswath DamodaranHOST
And one reason, of course, is when you have this efficiency component, it's going to allow you to grow faster because now you're improving the return on capital.
28 MINS LATER
Aswath DamodaranHOST
So when somebody makes up a sales to capital ratio that you know is out of the norm, you can push back and say, "That number looks off, .25," or, "That number looks great." But having that perspective is key in making your estimation.
Aswath DamodaranHOST
Which brings me to the big number in every DCF valuation.
Aswath DamodaranHOST
The big en-enchilada in every DCF, the terminal value.
Aswath DamodaranHOST
It's the number where the most mischief is created in valuation.
Aswath DamodaranHOST
So work on it.
Aswath DamodaranHOST
So today, we're gonna talk about that big number in every discounted cash flow valuation, the terminal value.
Aswath DamodaranHOST
It's a number where the most damage gets done in valuation because people do some really weird stuff.
Aswath DamodaranHOST
Okay? So today's start of the class test, I'm gonna focus on some of the questions that are going to drive.
Aswath DamodaranHOST
So the first question.
Aswath DamodaranHOST
Now, to get the terminal value, value of the company in year five or year ten, I'm gonna give you four choices, and I want you to tell me the one choice you should never use because it doesn't belong in an intrinsic valuation.
Aswath DamodaranHOST
A liquidation value.
Aswath DamodaranHOST
Is that okay in an intrinsic valuation? In other words, you stop in year ten, you liquidate all the assets, you get cash flows.
Hamish HodderHOST
A stock is essentially a bond that can goes forever until it dies.
Hamish HodderHOST
But what we do is we use a discounted cash flow, which is a mathematical formula that looks very, very similar to how we do bond valuation, except instead of getting a face value at the end of, say, five or 10 years, we use a terminal value which reflects the value of cash flows produced after that year into infinity.
Hamish HodderHOST
Now, I'm not gonna explain terminal value in this video.
Hamish HodderHOST
This video will go on forever.
Hamish HodderHOST
I'll leave a link to the specific terminal value video that I did down in the description below.
Hamish HodderHOST
But all you need to really understand is what we're going to be doing is projecting forward five years of cash flow or 10 years of cash flow, then adding a terminal value which reflects all of the cash flows after that time.
Hamish HodderHOST
And combined, that gives us a value of the cash flows discounted back at an appropriate rate, which is, in this case, the target return we want to make on the stock.
Hamish HodderHOST
The best and easiest way to do this is by using my free spreadsheet resource, again, linked down in the description below.
Erik AbrahamssonHOST
In practice, infinity is quite a long time, and investors' Excel sheets are limited to 16,384 columns.
Erik AbrahamssonHOST
Therefore, we typically stop the forecast at year 10 and then add something called a terminal value, which we'll get to soon.
Erik AbrahamssonHOST
For Cola, I think $10 billion doesn't look far-fetched for what we can expect it to earn during a normal year.
Erik AbrahamssonHOST
And now we must ask ourselves, will this grow or shrink in the coming years, and by how much? Careful so that you're not too optimistic when projecting growth rates, by the way.
Erik AbrahamssonHOST
Based on those two data points, I place more weight on the company's historical growth, let's say, um, around, uh, 4% going forward.
Erik AbrahamssonHOST
This means that Cola would be able to cash in something like $14.8 billion per year in 10 years.
Erik AbrahamssonHOST
Now, onwards to the terminal value mentioned before.
Erik AbrahamssonHOST
Basically, we use a terminal value as a replacement for the cash flows for years 11 to infinity.
Aswath DamodaranHOST
But in this case, to start, I assume that beyond year 10, the project continues.
Aswath DamodaranHOST
That's called a terminal value, basically capturing the value of what this theme park will be if it continues forever.
Aswath DamodaranHOST
I assume that the cash flows will grow at the inflation rate.
Aswath DamodaranHOST
You're saying, "Why did you stop at inflation?" If I allow growth to be higher than inflation, what am I doing in this theme park? Allowing more people to come into the park, right? And this keeps increasing by 3% or 1% or 2% every year.
Aswath DamodaranHOST
I grew it out one year at 2%.
Aswath DamodaranHOST
That's the inflation rate.
Aswath DamodaranHOST
Divided by the cost of capital that we estimated for this theme park, 8.46% minus 2%, gives me 11 thou- 11- $11.275 billion as my terminal value.
Aswath DamodaranHOST
It's the elephant in the room, because if you look at my cash flows in this project, there are my cash flows for the first 10 years.
Hamish HodderHOST
The next question we've got here is from Ahmed, who asks, "Hi, Hamish.
Hamish HodderHOST
Can you give us your thoughts on terminal value and its methods?" All right.
Hamish HodderHOST
So, uh, terminal value, for those who don't know, it's where you're estimating the combined total cash flows that a business could produce, say, beyond 10 years.
Hamish HodderHOST
So beyond where you could accurately estimate.
Hamish HodderHOST
So what we do is, or what I do, is we invest in, uh, we, we calculate, uh, what the future cash flows could be for the next 10 years.
Hamish HodderHOST
Over the 10 years, you've got an entire business cycle, sometimes two business cycles, and therefore you can find out what is the average amount of earnings or cash flow that a business could produce, and therefore you can average that over the 10 years and come to a ve- fairly reasonable estimation.
Hamish HodderHOST
So I've found that looking 10 years out is the best estimate.
Hamish HodderHOST
Uh, but what a lot of analysts will do in their models is they'll estimate the first 10 years or the first five years, and then they'll use what's called a terminal value, which is essentially what you could get for the company after that period ends.
Session 24: Dividend Closure and First Steps on Valuation
Sep 29 · 13 Mentions
Top 40%Aswath DamodaranHOST
Remember what we did with the Disney theme park? You got to year 10, we waved our hands and the project can go on forever.
Aswath DamodaranHOST
We brought in the cash flows beyond year 10 with a terminal value.
Aswath DamodaranHOST
That terminal value reflects present value of cash flows beyond that point in time.
Aswath DamodaranHOST
Now, I know there are multiple ways in which people compute terminal value.
Aswath DamodaranHOST
Most of them are incompatible with an intrinsic valuation.
Aswath DamodaranHOST
But how do bankers get terminal values? You ever worked at a bank, you get to the year 10.
Aswath DamodaranHOST
How do most banking valuations get that big N number? They use a multiple, EBITDA multiple, revenue multiple.
Aswath DamodaranHOST
That's a pricing.
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