Question

The terminal value of a business that grows indefinitely is calculated as follows:

1 Cash flow from period “t+1” divided by (discount rate – growth rate)

2 Cash flow from period “t+1” divided by (1 + discount rate)

3 Cash flow from period “t” divided by (discount rate – growth rate)

4 None of the above

choose 1 of the 4 above

Answer 1

The terminal value of a business that grows indefinitely is calculated as

1. Cash flow from period "t+1" divided by ( discount rate - growth rate)

Explanation : TV =[ FCFt +1 ] / [ r - g ]

TV = terminal value

FCFt = Free cash flow @ the last year of projected period

r = Discount rate ( cost of equity or cost of capital)

g = expected growth rate