DCF Growth Assumptions
Terminal Value Sensitivity & Year-by-Year Projection Architecture
Chapter 23 is where the growth analysis from Chapter 22 is translated into an explicit year-by-year FCF projection table — with per-year override capability, terminal value construction using both Gordon Growth and exit multiple approaches, and a dedicated sensitivity matrix showing how the concluded value responds to changes in the terminal growth rate assumption.
Why Terminal Value Assumptions Are Critical
In a typical DCF valuation, the terminal value — the value of all cash flows beyond the explicit projection period — represents 60–80% of the total Enterprise Value. This means that even a perfectly constructed 5–10 year FCF projection contributes only 20–40% of the final number. The terminal value assumption is therefore the single most important — and most contested — parameter in the entire model.
The terminal value is controlled by two inputs: the terminal growth rate (g) and the discount rate (WACC). Small changes in either produce large swings in value. A terminal growth rate of 3.0% versus 2.0% — a 100 basis point difference — can shift Enterprise Value by 15–30% in a typical DCF. This is why Chapter 23 dedicates a full terminal value sensitivity matrix to isolating this specific risk.
Equitest computes terminal value using two methods in parallel: the Gordon Growth Model (TV = FCF × (1+g) ÷ (WACC − g)) and an exit multiple approach (TV = EBITDA × multiple). Presenting both side by side is both an analytical best practice and a compliance requirement under IVS Standard 105 and USPAP Standards Rule 9.
Terminal Value — Two Methods
How Equitest Builds DCF Growth Assumptions
Chapter 23 translates the Chapter 22 growth framework into a complete, auditable projection table — with terminal value transparency and a dedicated sensitivity matrix.
Year-by-Year FCF Projection with Per-Year Override
The Chapter 22 growth pattern populates a split projection table — Years 1–5 and Years 6–10 — with each year displaying revenue, EBITDA margin, NOPAT, CapEx, ΔNWC, and FCF. Each individual year's growth rate and margin can be overridden with a custom value, with an override flag displayed in the report. The table is fully transparent: readers can trace every FCF figure back to its input assumptions.
Gordon Growth & Exit Multiple Side by Side
Both terminal value methods are computed simultaneously. The Gordon Growth Model uses the terminal growth rate from Chapter 22 (bounded below GDP growth). The exit multiple approach uses the median EV/EBITDA multiple from the comparable company set in Chapter 17. The implied terminal growth rate from the exit multiple approach is displayed — if it is unreasonably high or negative, the system flags a consistency warning.
Terminal Growth Rate × WACC Sensitivity Table
Chapter 23 includes a 5×5 sensitivity matrix showing Enterprise Value across a grid of terminal growth rates (±100–200 bps around the base) and WACC values (±100–200 bps around the base). This matrix makes visible — in a single table — how much of the total valuation uncertainty is attributable specifically to terminal value assumptions, isolating it from growth assumptions in the explicit period.
Long-Run Inflation and GDP as Terminal Growth Bounds
Equitest displays the current long-run inflation expectation (e.g., Federal Reserve 2% target) and consensus real GDP growth forecast alongside the terminal growth assumption. These serve as the theoretical floor and ceiling: the terminal growth rate should generally fall between long-run inflation (minimum) and long-run nominal GDP growth (maximum). If the analyst enters a rate outside this band, a disclosure note is auto-generated in the report.
Terminal Value as % of Enterprise Value Disclosed
Chapter 23 explicitly discloses what percentage of the concluded Enterprise Value is attributable to terminal value — a standard analytical quality check. When TV exceeds 80% of EV, Equitest flags this as a high-dependency alert, recommending that the analyst extend the explicit projection period, run additional sensitivity analysis, or increase the weighting of market-based methods in the Football Field Chart reconciliation.
Projection Table and Terminal Value Feed DCF Engine
The complete projection table — year-by-year FCFs and the terminal value under both methods — flows automatically into the core DCF calculation in Chapter 24. No manual data transfer. If the analyst modifies any Chapter 23 assumption, the Chapter 24 DCF result, the Chapter 26 sensitivity analysis, and the Chapter 28 Monte Carlo distribution all update automatically on save.
