# Terminal multipliers

## Estimation of terminal value of cash flows

Terminal multiplier – DCF:

Terminal multiplier = 1/(WACC of non discrete period – terminal growth rate)

Terminal value = (final projected year’s cash flow * (1+terminal growth rate)) / (WACC of non discrete period – terminal growth rate)

Terminal multiplier – DDM:

Terminal multiplier = 1/(cost of equity – terminal growth rate)

Terminal value = (final projected year’s cash flow * (1+terminal growth rate)) / (cost of equity – terminal growth rate)

However, the Gordon Growth model has it’s limitations. It assumes a stable growth rate and has no room for deviations. Furthermore, if the required rate of return is less than the terminal growth rate, the result becomes a negative value and makes the model not applicable.