{"id":18475,"date":"2021-07-23T07:01:07","date_gmt":"2021-07-23T07:01:07","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=18475"},"modified":"2025-12-10T17:31:29","modified_gmt":"2025-12-10T17:31:29","slug":"approaches-for-calculating-the-terminal-value","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-2\/approaches-for-calculating-the-terminal-value\/","title":{"rendered":"Approaches for Calculating the Terminal Value"},"content":{"rendered":"<script type=\"application\/ld+json\">\r\n{\r\n  \"@context\": \"https:\/\/schema.org\",\r\n  \"@type\": \"QAPage\",\r\n  \"mainEntity\": {\r\n    \"@type\": \"Question\",\r\n    \"name\": \"Given EPS data for 2019\u20132021 and a median trailing industry P\/E of 32 in 2020, what is the terminal value in 2020?\",\r\n    \"text\": \"Given the following information: EPS2019 = 2.30, EPS2020 = 3.00, EPS2021 = 3.50. If the median trailing industry P\/E in 2020 is estimated to be 32, the terminal value in 2020 is closest to: A. 73.6. B. 96.0. C. 112.0.\",\r\n    \"answerCount\": 1,\r\n    \"acceptedAnswer\": {\r\n      \"@type\": \"Answer\",\r\n      \"text\": \"The correct answer is B. Terminal value in year n = Justified trailing P\/E \u00d7 Forecasted earnings in year n = 3 \u00d7 32 = 96. This uses the 2020 forecasted EPS of 3.00 multiplied by the industry P\/E of 32 to obtain the terminal value.\"\r\n    }\r\n  }\r\n}\r\n<\/script>\r\n\r\n<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/A10ZXpSEZaM\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><span data-mce-type=\"bookmark\" style=\"display: inline-block; width: 0px; overflow: hidden; line-height: 0;\" class=\"mce_SELRES_start\">\ufeff<\/span><\/iframe><\/p>\r\n\r\n<p>The terminal value can be calculated using a:<\/p>\r\n<ul>\r\n\t<li>Single-stage (constant-growth) model.<\/li>\r\n\t<li>Valuation multiples approach.<\/li>\r\n<\/ul>\r\n<p>Under the valuation multiples approach, there are two ways this can be done.<\/p>\r\n<p>$$\\begin{align*} &#038; \\text{Terminal value in year }n \\\\ &amp;=\\text{Justified trailing P\u2044E}\\times\\text{Forecasted earnings in year }n\\\\ &#038; \\text{Terminal value in year }n \\\\ &amp;=\\text{Justified leading P\u2044E}\\times\\text{Forecasted earnings in year }n+1\\end{align*}$$<\/p>\r\n<h4>Example: Estimating Terminal Value with a P\/E Multiple<\/h4>\r\n<p>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 <em>closest<\/em> to:<\/p>\r\n<h4>Solution<\/h4>\r\n<p>$$\\text{Terminal value in Year 5}=28\\times\\$5.00=\\$140$$<\/p>\r\n<blockquote>\r\n<h2>Question<\/h2>\r\n<p>Given the following information,<\/p>\r\n<ul>\r\n\t<li>\\(\\text{EPS}_{2019}=2.30\\)<\/li>\r\n\t<li>\\(\\text{EPS}_{2020}=3.00\\)<\/li>\r\n\t<li>\\(\\text{EPS}_{2021}=3.50\\)<\/li>\r\n<\/ul>\r\n<p>If the median trailing industry P\/E in 2020 is estimated to be 32, the terminal value in 2020 is <em>closest<\/em> to:<\/p>\r\n<ol style=\"list-style-type: upper-alpha;\">\r\n\t<li>73.6.<\/li>\r\n\t<li>96.0.<\/li>\r\n\t<li>112.0.<\/li>\r\n<\/ol>\r\n<h4>Solution<\/h4>\r\n<p><strong>The correct answer is B.<\/strong><\/p>\r\n<p>$$\\begin{align*} &#038; \\text{Terminal value in year }n &amp; \\\\ &#038; =\\text{Justified trailing P\u2044E}\\times\\text{Forecasted earnings in year }n\\\\&amp;=3\\times32=96\\end{align*}$$<\/p>\r\n<\/blockquote>\r\n<p>Reading 24: Free Cash Flow Valuation<\/p>\r\n<p><em>LOS 24 (l) Describe approaches for calculating the terminal value in a multistage valuation model.<\/em><\/p>\r\n","protected":false},"excerpt":{"rendered":"<p>\ufeff 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*} &#038; \\text{Terminal value in year }n \\\\ &amp;=\\text{Justified trailing P\u2044E}\\times\\text{Forecasted earnings&#8230;<\/p>\n","protected":false},"author":5,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[102,401],"tags":[470,216,402,459],"class_list":["post-18475","post","type-post","status-publish","format-standard","hentry","category-cfa-level-2","category-equity-valuation","tag-approaches-for-calculating-the-terminal-value","tag-cfa-level-2","tag-equity-valuation","tag-reading-28-free-cash-flow-valuation","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Approaches for Calculating the Terminal Value - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"The terminal value can be calculated using: (1). 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