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NISM Certifications · NISM-Series-XV: Research Analyst · Valuation Principles

Which of the following best describes the 'terminal value' in a multi-stage discounted cash flow valuation of a company?

Terminal value is the value of all cash flows beyond the explicit forecast period, stated as of the end of that period. It is discounted back to today and added to the present value of the forecast cash flows to arrive at the total value.

  1. AThe value of all cash flows beyond the explicit forecast period, expressed as of the end of that periodCorrect
  2. BThe book value of equity at the end of the explicit forecast period
  3. CThe cash balance the company holds at the valuation date
  4. DThe liquidation value of the assets at the start of the forecast

Explanation

In a multi-stage DCF, cash flows are forecast explicitly for a limited period. Terminal value captures the value of all cash flows after that period, as of the end of the forecast. It is then discounted back to the present. Book value, cash balance and liquidation value are not what terminal value measures.

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