In a DCF analysis, what is referred to as terminal value (TV)?

The terminal value (TV) in a Discounted Cash Flow (DCF) analysis represents the estimated value of a business beyond the explicit forecast period, capturing all future cash flows expected to be generated from the business after the projection period. The rationale behind calculating terminal value is that it accounts for the bulk of a company's total value. Typically, the projection period covers a finite number of years, often ranging between three to five years. Since businesses are expected to continue generating cash flows well beyond this limited timeframe, terminal value reflects the assumption that the firm will continue to produce cash flows in perpetuity or at a steady growth rate thereafter.

This component is crucial in a DCF analysis because it allows for a more comprehensive valuation of the business by including the cash flows that will be generated after the initial forecasting period. The calculation of terminal value can be performed using either the Gordon Growth Model, which assumes a perpetual growth rate or the exit multiple method, which applies industry multiples to EBITDA or other financial metrics.

Other options focus on different aspects of financial modeling and cash flow analysis but do not capture the essence of terminal value. For instance, referencing future cash flows specifically for the next three years does not encompass the longer-term perspective that terminal value accounts for. Similarly, discussing