TIPS AND TRICKS TO AVOID COMMON MISTAKES IN CALCULATIONS OF THE TERMINAL VALUE FOR FINANCIAL MODELS

Abstract

In this article I explain three different models for terminal value with debt: absolute amount of debt, target market value capital structure ratio and target book value capital structure. So far business valuation and capital budgeting profession is faced with a lot of challenges, omissions and misunderstandings. One of such obscure issues concerns recalculation of terminal value as of the end of forecasting horizon to the present value as of the valuation date. The prevailing approach to do this task is by means of discounting terminal value using WACC. Unfortunately, this approach is broadly misunderstood and results in incorrect estimates. In this article I show typical mistakes and explain the correct ways to calculate terminal value as of the valuation date. In addition, I provide detailed Excel-based templates enabled with restrictions checking.