How to Calculate Terminal Value in a DCF (Gordon Growth & Exit Multiple)

Key takeaway

How to calculate terminal value in a DCF using the Gordon-Growth and exit-multiple methods, why it dominates valuation, and how to keep it realistic.

Terminal value captures a company's worth beyond the explicit forecast period of a DCF — the cash flows that continue after your last modelled year. Because a business is assumed to operate indefinitely, terminal value often represents 50% to 75% of total enterprise value, which makes it the single most important — and most abused — number in a DCF. There are two standard ways to calculate it: the Gordon-Growth (perpetuity) method and the exit-multiple method.

The Gordon-Growth method

Gordon Growth assumes free cash flow grows at a constant rate forever: TV = final-year FCF × (1 + g) ÷ (WACC − g). The perpetual growth rate g should approximate long-run GDP plus inflation — typically 2% to 3% — and must always be strictly below WACC, or the formula divides by a negative number and produces nonsense. Small changes in g swing the valuation sharply, which is why it belongs in a sensitivity table.

The exit-multiple method

The exit-multiple method values the business at the end of the forecast using a market multiple, most commonly EV/EBITDA: TV = final-year EBITDA × exit multiple. It anchors the terminal value to how comparable companies actually trade, which is reassuring, but it imports current market sentiment into a long-term valuation. Best practice is to compute both methods and check they are in the same ballpark.

Discount it back

Whichever method you use, terminal value sits at the end of the forecast, so it must be discounted back to today at WACC before adding it to the sum of discounted cash flows. Forgetting to discount the terminal value is a classic error that massively overstates value.

A worked example

Suppose your final forecast year produces $10m of free cash flow, WACC is 10%, and perpetual growth is 2.5%. Gordon Growth gives a terminal value of $10m × 1.025 ÷ (0.10 − 0.025) = $136.7m at the end of the forecast. If that is year five, you discount it back at 1 ÷ 1.10^5 = 0.621, so its present value is about $84.9m. Notice the sensitivity: nudging perpetual growth to 3.5% lifts the undiscounted terminal value to roughly $159m — a 16% jump from a single one-point change. That sensitivity is the entire argument for presenting a range rather than one figure.

Perpetual growth (g)	Terminal value	vs base
1.5%	$119.4m	-13%
2.5% (base)	$136.7m	—
3.5%	$159.2m	+16%
4.5%	$190.0m	+39%

Terminal value sensitivity to perpetual growth (final-year FCF $10m, WACC 10%)

Keep it honest

If terminal value is more than about 75% of your enterprise value, the explicit forecast is doing too little work — consider extending it so more value comes from cash flows you have actually modelled. The EasyFinancialModels DCF Valuation Model computes terminal value both ways (Gordon Growth and an EV/EBITDA cross-check), flags any breach of the WACC-versus-growth rule in its integrity checks, and includes sensitivity tables so you can see the range, not just a point. It's free for a 3-year model and downloads as editable Excel.

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More DCF & Valuation guides

How to Build a DCF Model in Excel (Step-by-Step Guide) · Hurdle Rate Explained: How to Set the Minimum Return (and Use It with NPV & IRR) · DCF Valuation Explained for Founders and Analysts · How to Calculate WACC and Cost of Equity (CAPM Formula) · Enterprise Value vs Equity Value: The Difference Explained

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Every model is built and reviewed by the project's Financial Advisor — a Fellow Chartered Accountant (FCA) of the Institute of Chartered Accountants of Pakistan (ICAP), Chartered Global Management Accountant (CGMA) and Associate Chartered Management Accountant (ACMA) with around two decades of corporate finance, audit and accounting experience, designing investor-grade financial models across industries. Full credentials and background are available on LinkedIn. More about the author →

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