###### Components of Total Return for a Fully ...

The total return on commodity futures is analyzed into the following key components:... **Read More**

The terminal value can be calculated using a:

- Single-stage (constant-growth) model.
- Valuation multiples approach.

Under the valuation multiples approach, there are two ways this can be done.

$$\begin{align*}\text{Terminal value in year }n&=\text{Justified trailing P⁄E}\times\text{Forecasted earnings in year }n\\ \text{Terminal value in year }n&=\text{Justified leading P⁄E}\times\text{Forecasted earnings in year }n+1\end{align*}$$

The EPS of a particular company is estimated to be $5.00 in five years. The EPS in six years is estimated to be $5.90. If the median trailing industry P/E is estimated as 28, the terminal value in year 5 is *closest* to:

$$\text{Terminal value in Year 5}=28\times\$5.00=\$140$$

## Question

Given the following information,

- \(\text{EPS}_{2019}=2.30\)
- \(\text{EPS}_{2020}=3.00\)
- \(\text{EPS}_{2021}=3.50\)
If the median trailing industry P/E in 2020 is estimated to be 32, the terminal value in 2020 is

closestto:

- 73.6.
- 96.0.
- 112.0.
## Solution

The correct answer is B.$$\begin{align*}\text{Terminal value in year }n&=\text{Justified trailing P⁄E}\times\text{Forecasted earnings in year }n\\&=3\times32=96\end{align*}$$

Reading 24: Free Cash Flow Valuation

*LOS 24 (l) Describe approaches for calculating the terminal value in a multistage valuation model.*