FINANCE • PRACTICAL BUSINESS GUIDES
Terminal Value: Perpetuity Growth vs. Exit Multiple
By Taylor Frizzell, MBA • October 21, 2026
Terminal value estimates the value of cash flows after a detailed forecast ends. In a discounted cash flow model, it is a value at a future date—not today’s value and not an extra cash flow that can be added without discounting. Two common approaches are perpetuity growth and an exit multiple.
Where terminal value fits
Operating enterprise value today = Present value of explicit FCFF + Present value of terminal operating value.
This guide uses free cash flow to the firm and WACC. An equity cash-flow model instead needs equity cash flows, an equity discount rate, and an equity terminal value. Do not mix an EV/EBITDA terminal value with FCFE without reconciling financing claims.
Method 1: perpetuity growth
TV at year n = FCFF in year n+1 ÷ (WACC − g)
Here, g is a sustainable constant growth assumption after the explicit forecast. WACC must exceed g. Using g equal to or above WACC breaks the stable-growth model; a negative output is not a valid bargain valuation.
Stable growth requires an economically consistent business: mature margins, sustainable reinvestment, working capital, and financing assumptions. Revenue cannot grow forever without considering the assets and investment supporting it. Long-run growth should be defensible for the currency, inflation, market, and maturity of the business.
Original five-year example
Assume hypothetical year-end FCFF of $50,000, $55,000, $60,000, $65,000, and $70,000 in years 1–5. Use 10% WACC and 3% perpetual growth. These are invented assumptions, not market benchmarks or an extension of another page’s dataset.
| Step | Calculation | Result |
|---|---|---|
| First terminal cash flow | $70,000 × 1.03 | $72,100 in year 6 |
| Terminal value at end of year 5 | $72,100 ÷ (10% − 3%) | $1,030,000 |
| PV of terminal value | $1,030,000 ÷ 1.10^5 | $639,549 |
| PV of years 1–5 FCFF | Sum of each FCFF ÷ 1.10^year | $223,848 |
| Operating enterprise value today | $639,549 + $223,848 | $863,397 |
The year-5 $70,000 cash flow is included once in the explicit forecast. The terminal value represents years 6 onward, valued at the end of year 5. Terminal value contributes about 74.1% of today’s operating value here, so the long-run assumptions deserve close scrutiny.
Method 2: exit multiple
Terminal operating value = Terminal EBITDA × Exit EV/EBITDA multiple.
Suppose year-5 EBITDA is $150,000 and a hypothetical 7× trailing exit multiple is justified. Terminal enterprise value is $1,050,000 at the end of year 5. Discounting at 10% gives $651,967; adding $223,848 of explicit FCFF produces $875,816 of operating enterprise value today.
That is $12,418 more than the growth-method estimate, calculated before rounding. Similar answers are a useful cross-check, not proof that either estimate is right. Multiples embed expectations about growth, margins, reinvestment, risk, and capital markets.
Compare the methods
| Approach | Main input | Key risk |
|---|---|---|
| Perpetuity growth | Normalized future cash flow, WACC, sustainable g | Unrealistic stability or reinvestment assumptions |
| Exit multiple | Normalized metric and defensible future multiple | Importing current market mispricing or mismatched peers |
State whether the multiple uses trailing year-5 or forward year-6 EBITDA. A multiple based on a different metric or date needs corresponding changes. Public-company multiples are not automatic private-company benchmarks. See Comparable Company Valuation.
Sensitivity: operating value today
Hold all five explicit FCFF estimates unchanged. Recalculate both the explicit-period discounting and terminal value when WACC changes. Rounded results:
| WACC / growth | 2% | 3% | 4% |
|---|---|---|---|
| 9% | $892,968 | $1,011,039 | $1,176,338 |
| 10% | $778,021 | $863,397 | $977,233 |
| 11% | $688,720 | $752,763 | $835,104 |
A narrow gap between WACC and growth makes value highly sensitive. A sensitivity table shows consequences of assumptions; it does not establish which case is most probable.
Excel setup
With years 1–5 FCFF in B2:F2, WACC in B4, and g in B5, terminal value is =F2*(1+B5)/(B4-B5). Present value is that result divided by (1+B4)^5. Explicit-period PV is =NPV(B4,B2:F2) for these end-of-year flows. Add the two present values. Use a different timing convention only with consistent cash-flow and terminal discounting.
Common mistakes
- Using year-5 FCFF without growing it to year 6 in the growth formula.
- Adding future terminal value directly to today’s explicit cash-flow PV.
- Double-counting the final explicit cash flow or terminal sale proceeds.
- Assuming depreciation equals capex while forecasting growth without support.
- Keeping an unusually high cyclical margin in perpetuity.
- Deducting today’s debt from a future terminal value before discounting without a consistent financing model.
- Treating enterprise value as common equity value without adjusting for debt, excess cash, and other claims.
Frequently asked questions
Does terminal value assume an actual sale?
No. The growth model estimates continuing cash flows. An exit multiple can estimate a market value at the terminal date even when no sale is planned.
What if the business is not stable by year 5?
Extend the explicit forecast or add a transition stage. A five-year forecast is a modeling choice, not a rule that the company becomes mature then.
Should I average both methods?
Not automatically. Explain why the estimates differ and choose assumptions that fit the business. Averaging weak assumptions does not strengthen them.
Sources and related guides
Educational sources: CFA Institute: Free Cash Flow Valuation and CFA Institute: Market-Based Valuation. Examples are original hypothetical calculations.
Read DCF Valuation, WACC, Enterprise Value vs. Equity Value, and Sensitivity and Scenario Analysis. Return to Finance.
Apply stable growth to common dividends
Read the Dividend Discount Model guide for Gordon growth and two-stage per-share examples. It uses dividends and cost of equity, while this page uses FCFF and WACC.