fix the DCF terminal_value with Gordon Growth Model #213
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virattt
reviewed
Apr 12, 2025
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| # Terminal value | ||
| terminal_value = (owner_earnings * (1 + growth_rate) ** projection_years * terminal_multiple) / ((1 + discount_rate) ** projection_years) | ||
| terminal_value = (owner_earnings * (1 + growth_rate) ** projection_years * (1 + terminal_growth_rate) / (discount_rate - terminal_growth_rate)) / ((1 + discount_rate) ** projection_years) |
Owner
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This should be:
terminal_value = (
owner_earnings * (1 + growth_rate) ** projection_years
* terminal_growth_rate / (discount_rate - terminal_growth_rate)
) / ((1 + discount_rate) ** projection_years)
if you want to use the Gordon Growth model!
Author
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Thanks for replying. I did some research which supports my point including https://stablebread.com/warren-buffett-intrinsic-value/ and https://www.investopedia.com/terms/g/gordongrowthmodel.asp.
FV of TV = FCFn × (1 + g) / (r - g)
FV of TV = future value of terminal value
FCFn = Free cash flow for the last 12 months of the forecast growth period
r = discount rate (required rate of return)
g = estimated annual terminal growth rate
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