Gordon Growth Terminal Value Calculator
Estimate firm terminal value at the end of an explicit forecast from annual free cash flow to the firm, perpetual growth, and WACC. See the implied cash flow multiple and rate spread.
Use USD consistently. No conversion occurs. Enter annual firm cash flow, not EBITDA or equity cash flow.
How terminal value is calculated
Enter annual free cash flow to the firm for the last explicit forecast year. The calculator grows that amount once to estimate the first cash flow after the forecast, then divides by WACC less perpetual growth. This assumes annual cash flows paid at year end and constant growth and discount rates thereafter.
The result belongs at the end of the explicit forecast period. It is not discounted to today. This tool has no forecast length input and does not add the explicit forecast cash flows, subtract debt, add cash, or divide by shares. It therefore does not calculate a current equity value or a share price.
WACC must exceed growth for this positive cash flow perpetuity to converge. A small spread can produce a large and sensitive value. Negative growth above minus 100% is supported as a shrinking cash flow scenario. The calculator does not determine a sustainable growth rate or an appropriate WACC.
The implied multiple divides terminal value by the last forecast year’s cash flow, not by EBITDA or the following year’s cash flow. The spread is WACC less growth in percentage points. The growth figure is the entered assumption, not a measured percentage of value attributable to growth.
Step by step
- Enter the last forecast year’s annual free cash flow to the firm in USD.
- Enter matching annual perpetual growth and WACC percentages, with WACC above growth.
- Review value at the forecast end, the cash flow multiple, and the percentage point spread.
Worked example
Enter last forecast annual FCFF of 100,000 USD, annual perpetual growth of 3%, and WACC of 8%. The first annual cash flow after the forecast is 103,000 USD. The decimal rate spread is 0.05, giving terminal value of 2,060,000 USD at the end of the explicit forecast.
The implied multiple is 20.6 times the last forecast cash flow of 100,000 USD. WACC exceeds growth by 5 percentage points. No present value, explicit forecast value, equity bridge, or per share value is included. These inputs and outputs are covered by the calculation tests.
When to use this calculator
Use it to inspect the stable growth terminal component of a firm cash flow valuation after you have developed an explicit forecast and selected consistent annual FCFF, growth, and WACC assumptions.
Compare scenarios to see sensitivity to the growth and discount rate spread. The calculator does not prescribe a range of growth rates, decide whether a business can sustain them, or recommend an investment.
Common input mistakes
Do not enter the first cash flow after the forecast in the last forecast cash flow field; the calculator would grow it an extra time. Use consistent currency units for cash flow and value, such as whole currency units rather than mixing units with millions.
Do not read a 5 percentage point spread as a 5% change in WACC. Do not apply the displayed multiple to EBITDA. Terminal value belongs at the forecast end, so it must be discounted before it can be combined with present values in a full DCF.
Terminal value formula
g = entered annual growth / 100
w = entered annual WACC / 100
Next annual FCFF = last forecast annual FCFF × (1 + g)
Terminal value at forecast end = next annual FCFF / (w − g)
Implied multiple = terminal value / last forecast annual FCFF, when that cash flow is positive
Rate spread in percentage points = entered WACC − entered growth
The first cash flow after the forecast arrives one year after the valuation point for terminal value. Use free cash flow to the firm with WACC, matching currency, annual period, and nominal or real assumptions. An input of 3 means 3%, not 0.03%. This tool does not discount terminal value to the current valuation date.
Model limits and assumptions
The model assumes annual cash flows to the firm at year end, constant perpetual growth, and constant positive WACC above growth. It does not estimate sustainable reinvestment, future margins, financing changes, or a defensible growth rate. It excludes the explicit forecast, discounting to today, a bridge from firm value to equity, and share count. Zero cash flow describes this model’s zero stream rather than a company valuation conclusion. Negative initial cash flow is unsupported. Small rate spreads amplify assumption errors and numerical extremes may be unavailable.
Key terms
- Free cash flow to the firm
- Cash flow available to all capital providers after operating taxes and reinvestment, before debt financing cash flows. It is paired with a firm discount rate such as WACC.
- Terminal value timing
- The end of the explicit forecast, one annual period before the first cash flow valued by the growing perpetuity.
- Rate spread
- WACC less perpetual growth. Displayed in percentage points, then divided by 100 for the formula’s decimal denominator.
Related valuation methods
WACC Calculator estimates a weighted capital cost from entered financing assumptions. This terminal model then pairs WACC with firm cash flows. Neither tool verifies the assumptions against a company’s financial statements or market conditions.
The site’s DCF Valuation calculator uses equity cash flow and an equity required return. Dividend models also value equity. Their discount rates and cash flow definitions should not be copied into this firm model without reconciling the valuation basis.
FAQ
Is terminal value the same as present enterprise value?
No. The output values the modeled cash flows after the explicit forecast at the end of that forecast. A complete firm DCF also discounts terminal value and the explicit forecast cash flows to the valuation date. This tool does not perform those additional steps.
Why must WACC exceed perpetual growth?
For the supported positive cash flow perpetuity, the discounted series converges only when the discount rate exceeds the growth rate. Equality gives a zero denominator. A lower WACC does not produce a valid positive perpetuity value merely because a spreadsheet returns a negative number.
Can perpetual growth be negative?
Yes. Growth above minus 100% can represent a shrinking annual cash flow stream. WACC must still be positive and above growth. A declining scenario remains an assumption, not evidence that a business will follow that path indefinitely.
What happens when free cash flow is zero or negative?
Zero starting cash flow produces zero cash flows and terminal value in this constant growth model; the multiple is undefined because its denominator is zero. That does not establish that a company is worthless. Negative starting cash flow is outside this calculator’s supported positive cash flow valuation model.
Can I enter EBITDA or free cash flow to equity?
No. This model pairs free cash flow to the firm with WACC. EBITDA excludes cash items needed to derive free cash flow. Free cash flow to equity and dividends require an equity discount rate and a consistently defined equity model.
Related tools
Use WACC Calculator for capital cost assumptions and the FCFF and FCFE Bridge to distinguish cash flow bases. Review the equity basis of DCF and dividend valuation tools before comparing their values with this firm terminal value.