The value of the venture at the end of the explicit forecast period is called the horizon value, or what?

Question

BlackTom AI · Accepted Answer

Terminal value (also called the continuing value) is the standard term for the value of a business at the end of the explicit forecast period.

1) Relevant concepts:
- Explicit forecast period: the finite number of years for which detailed cash flows (e.g., FCF) are projected.
- Horizon/terminal value: the estimated value of all subsequent cash flows beyond that forecast period, condensed into a single value at the horizon date.
- Two common methods to compute terminal value: the perpetuity (Gordon growth) model and the exit multiple method.
  - Gordon growth formula: TV = FCF_{n+1} / (r - g), where FCF_{n+1} is cash flow in the first year after the forecast, r is the discount rate, and g is the long-run growth rate.
  - Exit multiple formula: TV = Metric_n × Multiple (e.g., EBITDA_n × chosen multiple).
- Discounting: the terminal value is then discounted back to present: PV_TV = TV / (1 + r)^n.

2) Step-by-step reasoning:
- At the end of the explicit forecast (year n) you still expect future cash flows indefinitely. Rather than forecasting each year, you summarize that tail value as one number at year n.
- Using the Gordon growth model: compute FCF for year n+1, pick r and g, apply TV = FCF_{n+1}/(r - g).
- Alternatively, estimate an appropriate market multiple and multiply it by the year-n operating metric.
- Finally, discount TV to present value with PV_TV = TV / (1 + r)^n and add to the PV of explicit-period cash flows to get enterprise value.

3) Why "terminal value" is correct:
- “Terminal value” is the widely accepted term synonymous with “horizon value” in valuation literature and practice; it specifically denotes the value at the end of the explicit forecast period representing all future value.

4) Why the other options are incorrect:
- Reversion value: sometimes used to mean resale or salvage value in limited contexts, but it is not the common, standard term used interchangeably with horizon value in DCF practice.
- Present value: refers to a value after discounting to today, not the value at the horizon date.
- Going-concern value: denotes the total value assuming continued operations (overall firm value), not specifically the single-period horizon value.
- Net present value (NPV): is the difference between discounted benefits and costs, not the terminal/horizon value.

Conclusion: The correct answer is terminal value, which matches the provided answer.

The value of the venture at the end of the explicit forecast period is called the horizon value, or what?单项选择题

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