Lesson 4 of 8
Measuring the terminal share
Compute what fraction of your own DCF sits past the forecast. On one real company at ordinary settings it is 59.9 percent, and small changes push it past 88.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- The terminal value is one cash flow divided by the gap between two estimates, so it moves faster than anything else in the model.
- On one real company at ordinary settings it carried 59.9 percent of the answer, and a shorter forecast with a narrower gap pushed it to 88.7 percent.
- Computing the share takes five lines and tells you which assumption your valuation actually rests on.
Every DCF stops forecasting somewhere and values the rest as a single lump. The question this lesson answers is how big that lump is in your own model, because it decides which assumption you should be arguing about.
Compute the terminal share, Procter and Gamble
- Take the last forecast year's cash flow. Starting from 15,147 million and growing 3 percent a year, year ten is 20,356.3 million.
- Grow it once more, at the terminal rate. At 2.5 percent, the first year of the perpetuity is 20,865.2 million.
- Divide by the rate less the terminal growth. 8 percent less 2.5 percent is 5.5 points, so 20,865.2 divided by 0.055 is 379,367 million. That is the value of everything after year ten, expressed in year-ten money.
- Discount it back. Ten years at 8 percent divides by 2.158925, giving 175,720 million in today's money.
- Divide by the total. The ten forecast years discount to 117,793 million, so the total is 293,513 million and the terminal value is 59.9 percent of it.
Terminal share of the answer, under four ordinary settings
- 10 years, 10% rate, 2.5% terminal50.0%
- 10 years, 8% rate, 2.5% terminal59.9%
- 5 years, 8% rate, 2.5% terminal77.2%
- 5 years, 6% rate, 3.5% terminal88.7%
Why it moves so fast
Step 3 is a division by the difference between two estimates. That difference is small, so a small change in either estimate is a large change in the divisor.
Going from an 8 percent rate to 6 percent takes the gap from 5.5 points to 3.5 and multiplies the terminal value by 1.57 before any discounting. Adding a point to terminal growth does the same thing from the other side. Neither change has anything to do with the company.
What a high terminal share means, and what it does not
It does not mean the model is wrong. A mature business really is mostly worth what it does after year ten, and a terminal share near 60 percent for a staples company is ordinary.
It means the forecast rows are not where the argument is. If 77 percent of your answer sits past year five, then the thing you should be defending is the perpetuity: the rate, the growth, and the claim that this company still exists in that form. Spending an afternoon on year three of the forecast is optimising the smaller quarter of the answer.
ValueScreener prints the terminal share beside every result and prints a caution when it passes 80 percent, because a model above that line is barely a forecast at all.
The cap on terminal growth
Nothing grows faster than the whole economy forever, which is why the perpetual rate is usually capped around the risk-free rate. The model itself has no opinion: set the terminal rate at 7.9 percent against an 8 percent discount rate and it returns an enormous number, because the divisor has collapsed to 0.1 of a point. Set it at or above the discount rate and the result is not defined at all, which is the one case the arithmetic refuses.
Check yourself
The terminal value is one cash flow divided by what?
- The discount rate
- The discount rate less the terminal growth rate
- The number of forecast years
Show the answer
Answer: B.
It is a growing perpetuity, so the divisor is the gap between two estimates. That gap is small, which is why the result moves fast.Cutting the discount rate from 8 percent to 6 percent, with terminal growth at 2.5 percent, does what to the terminal value before discounting?
- Reduces it, because a lower rate means a lower value
- Multiplies it by about 1.57, because the gap narrows from 5.5 points to 3.5
- Leaves it unchanged, because the cash flows are the same
Show the answer
Answer: B.
The divisor falls from 0.055 to 0.035, so the same year-ten cash flow buys a much larger perpetuity.Your model puts 77 percent of the value past the forecast. What follows?
- The model is wrong and should be rebuilt
- The argument worth having is about the terminal assumptions, not the forecast years
- The forecast is too long
Show the answer
Answer: B.
A high terminal share is normal for a mature business. It tells you where your own answer is coming from, and therefore what to defend.Sources
- Procter and Gamble, Form 10-K, fiscal year ended 30 June 2026, filed 2026-08-04: free cash flow of 15,147 million, the starting point for every figure above.
- Gordon's growing perpetuity, as used for the terminal value in the two-stage model.
- Damodaran, Investment Valuation: the practical cap on perpetual growth at about the risk-free rate, since no company outgrows its economy forever.
What this leaves out
- Every figure here uses the perpetuity growth method. An exit multiple moves the same problem into the multiple and does not remove it.
- The four settings shown are arithmetic on one company's filed cash flow, not a view about that company.
- A terminal share is a property of your assumptions, not a quality score. A low share can come from a high discount rate rather than from a better forecast.
- Nothing here is advice about any security.