Terminal value is often the biggest number in a DCF
Most DCF models forecast only a handful of years explicitly. The terminal value then represents everything beyond that forecast window. That can make it the dominant component of enterprise value.
The perpetual-growth formula is:
Terminal value = FCF in the next year ÷ (discount rate − terminal growth rate)
The denominator is why small assumption changes can have large effects.
Why a one-point change matters
Suppose terminal FCF is ₹100 crore.
| WACC | Terminal growth | Denominator | Implied terminal value |
|---|---|---|---|
| 12% | 3% | 9% | ₹1,111 crore |
| 12% | 4% | 8% | ₹1,250 crore |
| 12% | 5% | 7% | ₹1,429 crore |
| 11% | 4% | 7% | ₹1,429 crore |
| 13% | 4% | 9% | ₹1,111 crore |
A one-percentage-point assumption change can move the terminal value by hundreds of crores in this simplified example.
Read sensitivity as a range, not a menu
A sensitivity grid is not an invitation to choose the cell that supports a preferred conclusion. It is meant to show how dependent the valuation is on uncertain inputs.
A robust interpretation asks:
- Is the base case near the middle of a reasonable range?
- Does the investment thesis still make sense under the conservative cells?
- Does terminal value dominate total enterprise value?
- Are the growth and discount assumptions internally plausible together?
Terminal growth should be treated conservatively
A perpetual-growth assumption extends indefinitely. That makes aggressive long-term growth especially consequential. The model may only forecast five explicit years, but terminal growth implicitly affects all later years.
WACC is not just a knob to lower the valuation
The discount rate represents the return required for the risk of the cash flows being valued. It should be estimated consistently rather than changed merely to obtain a desired number.
Frequently asked questions
Why does WACC need to exceed terminal growth?
Because the perpetual-growth formula uses WACC minus terminal growth in the denominator. If that spread is zero or negative, the model stops being economically meaningful.
Is a sensitivity table optional?
For a serious DCF it should not be. It is one of the clearest ways to show how fragile or robust the single-point result is.
Does a wide valuation range mean DCF is useless?
No. It means the model is correctly revealing uncertainty rather than hiding it.
Should I use the highest terminal growth that still keeps WACC above it?
No. Mathematical validity is not the same as economic plausibility.