Business Valuation
Stress-test terminal value
Why can a one-point change in perpetual growth move a valuation so much?
Practise stress-test terminal value with a worked example and a short check.
Terminal value estimates cash flows beyond the explicit forecast. A small discount-rate-minus-growth spread magnifies assumptions.
Terminal value at year n = FCFF in year n + 1 ÷ (WACC − growth)
$8m ÷ (10% − 2%) = $100m at year five. $100m ÷ 1.10⁵ ≈ $62.09m today.
Year-six FCFF is $8m, WACC is 10% and growth is 2%. At year five, terminal value is $100m. Discounting five years gives about $62.09m today.
$8m ÷ (10% − 2%) = $100m at year five. $100m ÷ 1.10⁵ ≈ $62.09m today.
At the same $8m next-year cash flow, what is year-five terminal value if WACC rises to 12%?