Series 79 practice questioneasyTerminal Value Calculation
In a DCF model, the terminal value captures:
- AThe value of the company's assets at liquidation
- BPost-forecast cash flows✓ Correct answer
- CThe present value of the company's dividends
- DThe transaction premium in an M&A deal
Explanation
Why B — Post-forecast cash flows
The terminal value represents the value of all cash flows the company is expected to generate beyond the explicit projection period (typically 5-10 years). It assumes the business continues operating indefinitely as a going concern, growing at a sustainable long-term rate. The terminal value often constitutes 60-80% of the total enterprise value in a DCF, making the assumptions behind it critically important to the overall valuation.
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