In a DCF analysis, which component is added to the unlevered free cash flow to determine total value?

In a DCF analysis, which component is added to the unlevered free cash flow to determine total value?

• A. Debt
• B. Working Capital
• C. Terminal Value
• D. Tax Rate

Answer: (C)

In a Discounted Cash Flow (DCF) analysis, total value is determined by adding the terminal value to the unlevered free cash flow. The unlevered free cash flow represents the cash generated by the business that is available to all capital providers, while the terminal value captures the value of the business beyond the explicit forecast period, reflecting the cash flows expected to be generated indefinitely into the future. The terminal value is typically calculated using methods such as the Gordon Growth Model or an exit multiple approach and is crucial for encapsulating the long-term growth potential of the firm. When combined with the present value of the forecasted unlevered free cash flows, it provides a more comprehensive assessment of the total value of the business, thus forming a foundational component during valuation in DCF analysis.

In a Discounted Cash Flow (DCF) analysis, total value is determined by adding the terminal value to the unlevered free cash flow. The unlevered free cash flow represents the cash generated by the business that is available to all capital providers, while the terminal value captures the value of the business beyond the explicit forecast period, reflecting the cash flows expected to be generated indefinitely into the future.

The terminal value is typically calculated using methods such as the Gordon Growth Model or an exit multiple approach and is crucial for encapsulating the long-term growth potential of the firm. When combined with the present value of the forecasted unlevered free cash flows, it provides a more comprehensive assessment of the total value of the business, thus forming a foundational component during valuation in DCF analysis.