Terminal Value, Growth, and Inflation: Some Practical Solutions

Terminal or continuing value (CV) is a key element in calculating the value of firm capital in any income-based valuation model. This paper focuses on calculating CV in the context of a firm operating as a going concern, highlighting some of the problems associated with the treatment of growth and inflation, which, although investigated in the literature, are not generally dealt with using sufficiently in-depth analysis. The effect of inflation on forecasted income and cash flows is examined, emphasizing issues that can have a significant impact on value, even in presence of a low inflation rate, such as that employed in CV estimation. Situations are introduced where the impact of inflation can be distinguished, and which therefore require different measures, followed by a discussion of their degree of realism. Simplified procedures within these situations are indicated that properly consider inflation and therefore lead to an internally consistent calculation of CV.