Which method is NOT used to calculate Terminal Value in a discounted cash flow analysis?

The terminal value in a discounted cash flow analysis is designed to capture the value of a business beyond the explicit forecast period, typically using methods that assess the continuing cash flows into perpetuity or until a specific exit multiple is applied.

The terminal growth multiple method and the perpetuity method (also referred to as the Gordon Growth Model) are both well-established methods used to determine terminal value. The perpetuity method assumes cash flows will continue indefinitely at a constant growth rate, while the terminal growth multiple method applies an industry-specific multiple to the projected cash flows at the end of the forecast period.

The discounted cash flow method focuses on valuing the business based on the present value of future cash flows and is an essential part of the overall discounted cash flow analysis, including terminal value calculations.

Conversely, the market multiple method is not traditionally categorized as a direct calculation for terminal value in a discounted cash flow analysis. Instead, it is generally used in relative valuation, comparing a company’s metrics against those of its peers. By contrast, terminal value in the discounted cash flow context directly uses projected cash flows to evaluate future value, rather than relying on market comparisons.

Thus, the market multiple method stands apart from the standard techniques recognized within discounted cash flow analyses for terminal value calculation