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It’s used in financial modeling and valuation to estimate the company’s long-term value. In particular, the Terminal Growth Rate is used in a DCF analysis to help calculate the TerminalValue. Different industries have varying Terminal Growth Rates based on growth potential and market maturity.
Quoted from Wall Street Oasis.com, it describes discounted cash flow (DCF) process by estimating the total value of all future cash flows (both inflow and outflow), and then discounting them (usually using WeightedAverageCost of Capital – WACC ) to find a presentvalue of the cash flow.
It’s also used for calculating a company’s share price, the value of investments, projects, and for budgeting. The DCF method takes the value of the company to be equal to all future cash flows of that business, discounted to a presentvalue by using an appropriate discount rate. Explaining The TerminalValue.
These methods, such as the Discounted Cash Flow (DCF) analysis, estimate the presentvalue of expected future cash flows generated by the business and directly link valuation to the underlying financial performance of the enterprise. The future cash flows are then discounted back to their presentvalue using a discount rate.
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