Step three is to calculate the terminal equity value. So we'll take our forecast period, a multi-year dividend forecast, and typically we'll assume that dividends fall in the middle of the year. And that will be true, particularly if it's a private organization. So you can take dividends out whenever you'd like. If it's a public company, that may be different. But generally speaking, for a private company, we can take dividends out. And then in the final year, what we'll assume is a terminal value, and that will be based on the Gordon growth model, taking the final dividend, and using the cost of equity and the growth rate to give us our terminal equity value. Note here that if you take the final dividend and you want to make sure that your terminal value is in the same year as your last dividend forecast, then you need to take that final dividend and grow it by one plus G to make it actually the year after the final year, because the Gordon growth model will discount the first dividend that you give it. And that means that if we take the year after the final year, it will give us the terminal value in the final year. We're using a cost of equity, not a WACC, and we're using a growth rate which reflects the long-term growth rate in dividends. So that will give us our terminal equity value. Step four is to do the discounting. So we'll take our forecast and we'll assume that the dividends will fall in the middle of each year. And we'll discount these dividends by one plus a cost of equity, to the power of the time period, which in the first dividend will be half a year, the second dividend, one and a half years, the third dividends, two and a half years, the fourth dividend, three and a half years, et cetera. And this is because we're assuming the dividends fall halfway through the year. So in this case, with the terminal value, we will also discount the terminal value by a mid-year period. In this case, we've got a five-year forecast of dividends. So we'll discount the terminal value to the power of four and a half. And remember, when we do the discounting, we will use the cost of equity to do the discounting because we are only discounting dividends here. You can double check your valuation by taking an implied PE multiple, and an implied price to book value multiple. And that's a good thing to do, both overall, when you get the end value at the very beginning, and just for the terminal value. And what you should expect to see is that both the price earnings, implied price earnings multiple, and implied price to book value multiple will decline if your growth rate declines as you reach your terminal value. And this means that you'll end up with an equity value, and you don't need to make any other adjustments, because we've been discounting the dividends. And that will give you the value of the bank.
