The Mysterious Terminal Value Formula

                                          

One of the most important formulas in Discounted Cash Flow Valuation is the terminal Value formula which is stated as follows:

When I saw this formula for the first time (long back!), I was surprised that how can one formula calculate the entire terminal value of a firm. The terminal value formula assumes that the firm will continue to infinity, hence this single formula is calculating the entire terminal value of the firm, for all cash flows after year "t" to infinity.


In discounted cash flow valuation, after a certain number of years, we stop forecasting the annual cash flow to the firm and calculate the entire value of the firm thereafter, through this single formula.

In this blog, I will try to show how this formula is derived which can be useful to demystify this formula.

I have used three steps to explain the formula wherein, I explain the finite geometric series, the infinite geometric series, and then finally the application of infinite geometric series to derive the terminal value formula.   

Please click on the below link to read the full blog post.

The Mysterious Terminal Value Formula

The document contains mathematical formulas and I thought it would be better to provide a link to the document rather than posting all formulas as images.



I hope the blog has helped clarify the concept of terminal value formula.

In case of any queries, you can leave your comment or contact me at tulsyananimesh@gmail.com