Terminal value in an unlevered DCF is found using which method?

Terminal value in an unlevered DCF is found using which method?

• A. Discount rate
• B. Exit multiple or perpetuity formula
• C. Tax rate
• D. WACC

Answer: (B)

In an unlevered DCF, the terminal value represents the value of all cash flows after the explicit forecast period, assuming the business continues operating at a stable level. The standard ways to capture this ongoing value are either a perpetuity growth model or an exit multiple applied to a terminal metric. The perpetuity approach uses a stable growth rate and the discount rate to compute TV, typically: TV = terminal cash flow × (1 + g) / (r − g). Alternatively, you can apply a multiple from comparable firms to a terminal metric (like EBITDA) to derive TV. These methods directly estimate the value of enduring operations beyond the forecast window. The discount rate, by contrast, is used to bring future cash flows back to present value, and the tax rate affects the cash flow amounts you project. WACC is the rate used for discounting in an unlevered framework. However, they are tools for valuation and discounting, not the method used to determine the terminal value itself.

In an unlevered DCF, the terminal value represents the value of all cash flows after the explicit forecast period, assuming the business continues operating at a stable level. The standard ways to capture this ongoing value are either a perpetuity growth model or an exit multiple applied to a terminal metric. The perpetuity approach uses a stable growth rate and the discount rate to compute TV, typically: TV = terminal cash flow × (1 + g) / (r − g). Alternatively, you can apply a multiple from comparable firms to a terminal metric (like EBITDA) to derive TV. These methods directly estimate the value of enduring operations beyond the forecast window.

The discount rate, by contrast, is used to bring future cash flows back to present value, and the tax rate affects the cash flow amounts you project. WACC is the rate used for discounting in an unlevered framework. However, they are tools for valuation and discounting, not the method used to determine the terminal value itself.