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Series 79 practice questionmediumTerminal Value Calculation

Using the Gordon Growth Model (perpetuity growth method), terminal value is calculated as FCF x (1 + g) / (WACC - g). If the final year FCF is $100 million, the long-term growth rate is 2.5%, and WACC is 10%, what is the terminal value?

  1. A$1,333 million
  2. B$1,000 million
  3. C$1,367 million✓ Correct answer
  4. D$1,250 million
Explanation

Why C — $1,367 million

Terminal Value = FCF x (1 + g) / (WACC - g) = $100M x 1.025 / (0.10 - 0.025) = $102.5M / 0.075 = $1,366.7M, approximately $1,367 million. The (1 + g) factor grows the final year's cash flow by one period to represent the first year of the perpetuity. The long-term growth rate should not exceed the expected long-term GDP growth rate, as no company can grow faster than the economy indefinitely.

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