The Analyst’s Course · Valuation & DCF
Terminal Value — the 80% Problem
Deriving Gordon growth
Assume cash flows grow at constant g forever. The present value of a perpetuity growing at g, discounted at w, is TV = FCFₙ × (1+g) ÷ (w − g). Derivation: it is an infinite geometric series — each year's term is the previous × (1+g)/(1+w), a converging sequence as long as w > g. Note what the formula implies: as g approaches w, TV approaches infinity. This is why g > WACC is not "aggressive," it is undefined — and the panel refuses to compute it.
The share-of-EV problem
With a 5-year explicit horizon, TV routinely lands at 70–80% of enterprise value. That means the "five-year DCF" is mostly a bet on one number (g) chosen by intuition. Mauboussin's long-running research (ATKM) puts the practical discipline in one move: convert TV into an implied multiple — what EV/FCF does the terminal assumption embed? A 3% g at 8.9% WACC implies ~16× terminal FCF; if that exceeds where mature peers trade, the model has quietly assumed superiority. The panel shows TV share and flags >75%.
Honest terminal assumptions
Three discipline moves: (1) start g at nominal GDP and justify down; (2) check the implied reinvestment — perpetual growth requires perpetual reinvestment at positive spreads; (3) cross-check with exit multiples from mature peers. If Gordon and exit-multiple disagree wildly, the explicit period is doing something wrong. The panel computes both terminal methods side by side precisely so you can watch them argue.
TV = FCFₙ × (1 + g) ÷ (WACC − g)
Gordon terminal value — Undefined (infinite) as g → WACC. Implied exit EV/FCF = (1+g)/(w−g) — always convert and compare to mature peers.
The g that ate the model
Run the panel's own arithmetic: AAPL at 8.87% WACC moves fair value from $104 to $148 per share when g moves from 2.5% to 3.5% — a 42% swing from a 1pp change in an assumption about the year 2031 and beyond. In 2000, Cisco bulls used g near 6% (WACC ~10%) for "internet leader" perpetuities; the stock then fell ~85% and took 20+ years to reclaim the price. The terminal input is where narratives hide, because it is the input no one can observe.
What you'll practise
Terminal value with g = WACC is…
3 graded checkpoints · certification exam at the end of the track
Sources
Damodaran (ERP data); Mauboussin, ATKM; McKinsey Valuation; IPO prospectuses (SEC S-1 filings)
Learn content is for education only — not individualized financial advice, a recommendation, or a solicitation to buy or sell any security. Options involve substantial risk. Examples are simplified and historical patterns never guarantee future results.