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CS Professional · Corporate Restructuring, Valuation and Insolvency · Valuation of Business and Assets for Corporate Restructuring

In a DCF valuation of Bharat Pumps Ltd, the analyst uses the Gordon growth model for terminal value. Year 5 FCFF is Rs 200 lakh, WACC is 12% and perpetual growth is 4%. What is the terminal value at the end of Year 5?

Terminal value is Rs 2,600 lakh. The next year's cash flow is 200 x 1.04 = 208, and dividing by the spread between WACC and growth (12% - 4% = 8%) gives 2,600. Using the Year 5 cash flow without growth would understate it.

  1. ARs 2,600 lakhCorrect
  2. BRs 1,667 lakh
  3. CRs 2,500 lakh
  4. DRs 1,733 lakh

Explanation

Terminal value = FCFF in Year 6 / (WACC - g) = 200 x 1.04 / (0.12 - 0.04) = 208 / 0.08 = Rs 2,600 lakh. Using 200/0.08 = 2,500 is wrong because it omits growing the Year 5 cash flow to Year 6.

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