Terminal value share

Sixty to eighty per cent is the ordinary range on a five year forecast, and that is a consequence of discounting rather than a defect: a going concern keeps producing cash long after year five, and one line has to stand in for all of it.

The property that gets missed is that the share depends on where the explicit period stops. Extend the horizon while holding the same growth path and the same terminal rate, and the value does not change at all while the share falls sharply, because cash flow moves from the capitalised line into the explicit years.

So the number is a prompt rather than a verdict, and it has three quite different causes. A horizon that ends before steady state, which is fixable by extending with a fade. A narrow WACC less g denominator, which is arithmetic and calls for a sensitivity table. Or an explicit period generating little or no cash, which can push the share above one hundred per cent and is honest rather than broken.

Because it is cheap to compute and immediately informative, stating it unprompted when presenting a DCF is a small signal that reads well. State the number of explicit years alongside it, or the figure cannot be interpreted.