If we think about where all of our cash flows are coming from in the DCF, we assume that they will be received from now until infinity from the first forecast period we calculate our free cash flows from years 1 to 5 or from years 1 to 10.

However, thereafter we may assume that the company enters some kind of steady state. It's now a mature company. It's during this period that we calculate the terminal value and this will represent the value of the remaining years year 6 to infinity or year 11 to Infinity now because that value represents so many years it's going to be a very large portion of your eventual value for your DCF. And that means it's also very sensitive to assumptions that you make when coming up with that value.

There are two techniques we can use to get to that terminal value.

The first is a growing perpetuity. We assume the company will grow at a nice steady state during this steady state period the growth rate used in that growing perpetuity is one of those assumptions. That's very sensitive.

The formula used to calculate the terminal value again, we assume at the end of the fifth year will be the forecast free cash flow for the fifth year multiplied by 1 plus the long term growth rate assumed to be constant throughout the terminal period this effectively gives us the forecast free cash flow for the sixth year this then needs to be divided by the WACC minus. The long term growth rate. This gives us the terminal value expressed at Time 5. The long term growth rate is a very important number since it will have a large impact upon the terminal value alternatively we could use the EV multiple or Enterprise Value multiple. This is where you take the companies EBIT or EBITDA in year 5 or 10 and then you multiply it by another company's EV to EBIT or EBITDA multiple again the multiple that you Is another one of those assumptions that will have a large impact on the terminal value.