The terminal value accounts for a large part of firm value. The terminal value as a percentage of firm value could be anywhere from 50-80%. If your terminal value is higher than 80% of the firm value, it will be considered on the higher side and you will need to explain why.
The factors that drive the terminal value as a percentage of firm value include:
- Number of years of the forecast period.
- The FCF/profitability of the forecast period – companies that are loss making in early years have a higher value of their firm value in the terminal period.
- Terminal growth rate, obviously!
Discount rate or spread between terminal growth rate and discount rate.