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How do calculate a terminal value in Investment Appraisal. i was looking a dec 2008 question one and did not get how the examiner worked out the terminal value. please need an assistance
If growth and cost of equity is given (or you have to calculate yourself), use the dividend valuation model to calculate the terminal value. In other words, terminal value means in perpetuity. 😀 hope that helped you !
The Do is equals to the cash flow of the year before perpetuity. Plus, don’t forget to times the discount factor of the previous year !
Example (given g=4%, Ke=10%):
Year 0 Cashflow = (1000) DF 10% = 1.000 PV = (1000)
Year 1 = 300 = 0.909 PV = 272.7
Year 2 = 1000 = 0.826 PV = 826
Thereafter (Terminal value) Cashflow = 1000(1+0.04)/0.1-0.04
DF = 0.826
PV = 14317.3NPV = 14416
Like that :).
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what does terminal value imply in the context of business valuation..? I mean what exactly does it mean ?
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