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The discount rate used in a DCF valuation model – often the WACC – has an outsized impact on the value of the business! So, getting the discount rate or WACC right is important. A key ingredient of the WACC computation is the weight of debt. Students are often not sure what is included in debt as there are a number of ways companies can finance their capital needs including accounts payables, notes payables, off-balance sheet liabilities, collataralization, etc.

We address this question “What kinds of liabilities are included in debt when computing the weight of debt (used in computing WACC)?” on this page.

Often, all of us, students and professionals, are tempted to fudge assumptions. We may call it mild terms such as “improving”, “modifying”, etc. to feel better about it. The first assumption we usually tamper with is revenue growth rates! But what can go wrong here? Does increasing the revenue growth rate (not terminal growth rate) increase firm value?

We address this question on this page “Does increasing the revenue growth rate (not terminal growth rate) increase firm value? What could be wrong if you do that?”

The terminal value as a percentage of firm value could be anywhere from 50-80%. Under specific conditions, your terminal value can also be higher than 80% of the firm value. And the terminal value is significantly impacted by the terminal growth rate. Even a little change in the terminal growth rate will result in millions of dollar difference in terminal value. Therefore it is important to get this right.

On this page, we address the question: Should you use the real rates of growth vs. nominal rate of growth when estimating terminal growth rates when using the perpetual growth rate method?

There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage of the company and expected growth drivers as well as the information available.

Each method has its advantages and disadvantages!

On this page, we address the question: “What are the draws backs of the liquidation (fire sale or orderly sale) approach to terminal value?”

There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage of the company and expected growth drivers as well as the information available.

Each method has its advantages and disadvantages!

On this page, we address the question: “What are the draws backs of the multiples approach to terminal value?”

The terminal growth rate is only one of the many assumptions you make in a DCF valuation. However, the terminal growth rate has a huge impact on the valuation. So it is very important that you get this right.

On this page, we address the question: “What are the key principles you must stick with when deciding on the terminal growth rate you use in your DCF valuation?”

There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage the company and expected growth drivers as well as the information available.

Each method has its advantages and disadvantages! In this page, we address the question: “What are the draws backs of the perpetual growth approach to terminal value? How do you address this?”

There are different methods to estimate terminal value in a DCF valuation. The perpetual growth rate method is the most common approach. Other methods include a multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage the company and expected growth drivers as well as the information available. The perpetual growth rate method is the most common approach. However, the perpetual growth rate is usually assumed to be a positive value. Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not? We address this question: “Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not?” on this page:

There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, a multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage the company and expected growth drivers as well as the information available. Which method should you use to estimate terminal value in a DCF valuation?