What is a terminal value in DCF valuation?

The terminal value in Discounted Cash Flow (DCF) valuation represents the total future cash flows of a business beyond the explicit forecast period. This is crucial because it captures the value of the firm as it grows indefinitely into the future after the detailed projections have concluded. Since cash flows are typically projected only for a limited time frame (like 5 to 10 years), estimating the terminal value allows analysts to account for the value generated after the detailed forecast period.

The terminal value is typically calculated using one of two methods: the perpetuity growth model, which assumes cash flows will grow at a stable rate indefinitely, or the exit multiple approach, which applies a multiple to a financial metric (like earnings or EBITDA) at the end of the forecast period. This helps to provide a comprehensive valuation of the company, considering not just the near-term cash flows but also the long-term sustainability and growth potential.

In contrast, other options do not accurately define terminal value. The projected cash flow at the end of the forecast period focuses too narrowly on a single point in time rather than the entire post-forecast future. The cash inflow from operations at the end of the model also ignores the broader concept of extending cash flows indefinitely. Lastly, mentioning the remaining asset value of