Series 79 practice questioneasyDiscounted Cash Flow (DCF) - Terminal Value
An investment banker is calculating a DCF valuation and uses the perpetuity growth method for terminal value. Which of the following best describes how terminal value is calculated using this method?
- AFCF_n × (1 + g) ÷ (WACC - g)✓ Correct answer
- BFinal year EBITDA multiplied by exit multiple
- CSum of all projected free cash flows
- DPresent value of total company debt
Explanation
Why A — FCF_n × (1 + g) ÷ (WACC - g)
Under the Gordon growth method, terminal value at the end of the explicit forecast equals next-period free cash flow divided by WACC minus perpetual growth: FCF_n × (1 + g) ÷ (WACC - g).
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