When doing a discounted cash flow, the terminal value often ends up being a very large proportion of your eventual enterprise value So we want to make sure we get it right There are two approached to calculating the terminal value and quite often people do both And they act as a check on each other. Let's start with the growing perpetuity formula This says that your terminal value in year N (I'm going to say this is year 5) equals your free cash flow from year 5 Times one plus the growth rate Now if you imagine, what is that? Your free cash flow in year 5 times one plus G, well that's really your free cash flow in year 6 But we use free cash flow year 5, times by one plus 5, all divided by your WACC minus G (or growth rate) Now compare that with your terminal EV multiple method This says your terminal value in year 5 is going to be your last 12 months EBITDA to the end of year 5 times by some kind of multiple Well what is this multiple? Because we're multiplying it by EBITDA, this is going to be an EV over EBITDA multiple So where has it come from? Well we look outside the company towards similar companies that have already reached the steady state Or they're already kind of in their terminal value period So we steal their EV over EBITDA and we put it into this formula here That now gives me two terminal value calculations, your growing perpetuity calculation and your terminal EV multiple calculation You can use those two figures to compare against each other Alternatively you can use the sense checks which we have in the second line down Under the growing perpetuity column, we can see that we can calculate an EV multiple Let's imagine the terminal value EV multiple in the top right that we were using was 8 Well if I use the sense check formula Where I take the terminal value in year 5, divide it by your last twelve months EBITDA in year 5 If that came out to about 8.1, that's very close to the 8 multiple that you were using in the top right hand corner I'd feel pretty sure that my two calculations are supporting each other Alternatively we could try and calculate the long term growth rate in the bottom right hand corner Quite a formula this one, it says it' your WACC times the by the terminal value in year 5 Minus your free cash flow in year 5, all over free cash flow year 5 plus terminal value year 5 Quite a tricky one that one. What that is, that is your formula from the top left hand corner Growing perpetuity formula, rearranged to find G So imagine the top left hand corner, we had used a G of 2%. And in the bottom right hand corner you've got a sense check of 2.1 Again I'd feel pretty comfortable that my terminal EV multiple method Is supporting my growing perpetuity method