Terminal Value

Terminal value usually dominates a DCF, so the assumption it embeds deserves more scrutiny than the detailed five-year forecast that precedes it. The terminal growth rate must be below the long-run growth rate of the economy, because a business growing faster than the economy forever would eventually become the economy — rates above 5% or so in nominal Indian terms are not defensible. The formula also breaks down as growth approaches the discount rate, producing absurd values from a small change in inputs. An exit-multiple approach is the common alternative, though it smuggles relative valuation into a supposedly absolute method.