What is one method used to calculate a firm's terminal value?

The method of applying a comparable company's multiple to the final year of projections is a widely recognized approach to calculate a firm’s terminal value. This technique leverages the principle that a company's value can often be derived from the valuations of comparable businesses in the same industry. By taking the last forecasted year in a company’s financial projections and multiplying it by the appropriate valuation multiple (such as EV/EBITDA, P/E, etc.) derived from similar firms, analysts can achieve an estimate of what the company is worth in perpetuity beyond the forecasted period.

This method is particularly effective because it draws on current market data, making it reflective of real-time valuation trends in the industry. It allows corporate finance professionals to ground their terminal value calculations in practical marketplace dynamics, thus enhancing the reliability of the financial analysis.

In contrast, other options may not provide a robust methodology for estimating terminal value. Using a historical average revenue does not account for future business growth or market changes, and calculating present value from current assets does not reflect the operating dynamics or future earnings potential of the firm. Estimating total sales over ten years projects revenues but doesn't translate those figures into a present value or terminal value context effectively.