Terminus Calculator

by
Terminus Calculator (Terminal Value)
Gordon Growth Method (Perpetuity)Exit Multiple Method
Terminal Value Result:
$ 0.00
function updateLabels(){var mode=document.getElementById('given_data').value;var l1=document.getElementById('label1');var l2=document.getElementById('label2');var row3=document.getElementById('row3′);if(mode==='exit'){l1.innerHTML='Final Year EBITDA ($):';l2.innerHTML='Exit Multiple (EV/EBITDA):';row3.style.display='none';}else{l1.innerHTML='Final Year Cash Flow ($):';l2.innerHTML='Discount Rate / WACC (%):';row3.style.display='table-row';}}function calculateResult(){var mode=document.getElementById('given_data').value;var v1=parseFloat(document.getElementById('input1').value);var v2=parseFloat(document.getElementById('input2').value);var v3=parseFloat(document.getElementById('input3').value);var showSteps=document.getElementById('steps').checked;var result=0;var detail="";if(isNaN(v1)||isNaN(v2)){alert('Please enter valid numeric values');return;}if(mode==='gordon'){if(isNaN(v3)){alert('Please enter a growth rate');return;}var r=v2/100;var g=v3/100;if(r<=g){alert('Discount rate must be higher than the growth rate for a stable terminus calculation.');return;}result=(v1*(1+g))/(r-g);if(showSteps){detail="Calculation: [Cash Flow ("+v1+") * (1 + "+g+")] / ("+r+" – "+g+")";}}else{result=v1*v2;if(showSteps){detail="Calculation: EBITDA ("+v1+") * Multiple ("+v2+")";}}document.getElementById('resultValue').innerHTML=result.toLocaleString(undefined,{minimumFractionDigits:2,maximumFractionDigits:2});var stepDiv=document.getElementById('stepDetail');if(showSteps){stepDiv.innerHTML=detail;stepDiv.style.display='block';}else{stepDiv.style.display='none';}document.getElementById('calculatorAnswer').style.display='block';}

Using the Terminus Calculator

The terminus calculator is an essential tool for financial analysts, business owners, and investors used to estimate the "Terminal Value" of a business or investment at the end of a projection period. In a Discounted Cash Flow (DCF) analysis, cash flows are typically projected for 5 to 10 years. However, businesses are generally expected to operate indefinitely. The "terminus" represents the value of all future cash flows beyond that explicit forecast period.

By using this terminus calculator, you can quickly switch between the two industry-standard methods of valuation: the Gordon Growth Method and the Exit Multiple Method. This ensures your long-term valuation is grounded in realistic mathematical assumptions.

Final Year Cash Flow / EBITDA
This is the projected financial performance of the company in the final year of your discrete forecast (e.g., Year 5 or Year 10).
Discount Rate (WACC)
The Weighted Average Cost of Capital represents the required rate of return for investors, used to discount future value back to the present.
Perpetual Growth Rate
The constant rate at which the company is expected to grow forever. This is typically aligned with long-term GDP growth or inflation (usually 2% to 3%).

How the Terminus is Calculated

When calculating the terminus value via the Gordon Growth Method, we assume the company reaches a "steady state." The formula applied within this terminus calculator is:

Terminal Value = [FCFn × (1 + g)] / (WACC – g)

  • FCFn: Free Cash Flow in the last projected year.
  • g: Perpetual growth rate (stable growth).
  • WACC: Weighted Average Cost of Capital (discount rate).

Alternatively, the Exit Multiple Method assumes the business is sold at the end of the projection period based on a market multiple of a metric like EBITDA. The terminus calculator simply multiplies the final year metric by the industry-standard multiple.

Terminus Calculation Example

Scenario: You are valuing a software company. Your explicit forecast ends in Year 5, where the company generates $500,000 in Free Cash Flow. You estimate a WACC of 10% and a perpetual growth rate of 2.5%.

Step-by-step solution using the Terminus Calculator:

  1. Select Gordon Growth Method.
  2. Input Final Year Cash Flow: $500,000.
  3. Input Discount Rate: 10%.
  4. Input Growth Rate: 2.5%.
  5. Calculate: ($500,000 * 1.025) / (0.10 – 0.025)
  6. $512,500 / 0.075
  7. Resulting Terminus Value: $6,833,333.33

Common Questions

Why is the terminus value so large compared to annual cash flow?

The terminus value often represents 60% to 80% of the total value in a DCF model because it accounts for all the cash a business will generate from the end of the forecast into infinity. It captures the long-term "staying power" of the asset.

What growth rate should I use?

Conservatism is key. The perpetual growth rate should generally not exceed the growth rate of the overall economy (GDP), which is typically between 2% and 3%. If you use a growth rate higher than the discount rate, the formula breaks, as no company can grow faster than its cost of capital forever.

When should I use the Exit Multiple method?

The Exit Multiple method is preferred when there is a robust market for comparable company acquisitions. It is commonly used by Private Equity firms who intend to sell the business at the end of their holding period. The Gordon Growth method is more common for theoretical academic valuations or stable, mature blue-chip companies.

Leave a Comment