Terminal Value, Growth and Inflation in DCF Models: Some Problems and Practical Solutions

Terminal value is a key element in calculating the value of firm capital in any version of discounted cash flow models. In this paper, attention is focused on calculating terminal value in the context of a firm operating as a going concern (continuing value, CV), highlighting some of the problems associated with the treatment of growth and inflation, which, although investigated in the literature, are not generally dealt with using appropriately in-depth analysis. The subject of inflation is deepened with its effects on forecasted income and cash flows, emphasising some issues that can have a significant impact on value, even in the presence of low inflation rates, such as those generally employed in CV. Some situations are introduced where the impact of inflation can be distinguished and therefore require different measures, followed by a discussion on their degree of realism. The simplified procedures within these situations are then indicated which properly take inflation into account and therefore arrive at an internally consistent calculation of CV.