In 30 seconds
- Terminal value rolls up all the cash flow after the projected period, and it usually accounts for 60% to 80% of the value.
- With Gordon: last year's FCF × (1 + g) / (WACC − g), with g equal to or below the growth rate of the economy.
- An exit multiple has perpetual growth built in: 25 times free cash flow with a 9.2% WACC is equivalent to a g of 5.0%.
- WACC combines the cost of equity (risk-free rate + beta × premium) and the after-tax cost of debt, weighted at market values.
- With Visa's fiscal 2025 accounts, value per share ranges from $242 to $399 depending on the discount rate and the horizon: the sensitivity is part of the answer.
Introduction
Visa generated $21,577 million of free cash flow in fiscal 2025, which ended on September 30, 2025. On October 2, 2026, its stock closed at $360.66, which values the company at about $709 billion. Run a five-year DCF with reasonable assumptions and you'll find something uncomfortable: roughly three-quarters of the value you get doesn't come from those five years, but from what happens afterward. That piece is the terminal value, and hardly anyone gives it the time it deserves.
In this lesson we value Visa from start to finish, using the figures in its annual report, and we take apart the two decisions that drive the result: the discount rate and the terminal value.
Explanation
In the lesson on intrinsic value and a simple DCF you saw the six steps: starting free cash flow, projection, terminal value, discount rate, discounting and converting enterprise value into a value per share. We won't repeat them here. We'll focus on the two that decide almost everything.
What terminal value is
A DCF projects free cash flow year by year over an explicit forecast period, usually five or ten years. But the company doesn't shut its doors in year 5. Terminal value rolls everything that comes afterward into a single figure, and there are two ways to calculate it.
The Gordon growth formula (or perpetuity growth method) assumes that, from the last projected year on, cash flow grows forever at a constant rate, g. It's a growing perpetuity: next year's cash flow divided by the gap between the discount rate and g.
The exit multiple method assumes you'd sell the company in year 5 at a multiple of some figure from that year, such as EBITDA or free cash flow itself. It's what an investment bank does when it says "at 15 times EBITDA." It's quick, but it hides a trap: the multiple you choose already has a perpetual growth rate baked into it, whether you know it or not.
Think of an orchard. You can value it by the next five harvests plus what someone would pay you for the land at the end (exit multiple), or by five harvests plus every harvest after that, growing slowly (Gordon). If the sale price you have in mind implies the harvest will grow 6% a year forever, you've valued an orchard that doesn't exist.
Why it carries 60% to 80% of the value
It's arithmetic. With a 9.2% discount rate and 3% perpetual growth, the perpetuity is worth year 6's cash flow divided by 0.062: about 16 times that cash flow. The five explicit years, once discounted, add up to less than five times today's cash flow. The faster the company grows and the lower the rate, the more of the weight shifts to the end.
The discount rate: WACC, piece by piece
The cash flows of a whole company are discounted at the WACC (weighted average cost of capital): the return shareholders and lenders demand together, weighted by how much each one contributes at market prices. It has three pieces.
1. Cost of equity. It's estimated with the CAPM: risk-free rate + beta × market risk premium. The risk-free rate is the yield on the 10-year US Treasury note. Beta measures how much the stock moves with the market, and the premium is the extra return investors demand for owning stocks (Aswath Damodaran, a professor at New York University, publishes his estimate every year; 5% is a common figure).
2. After-tax cost of debt. The rate at which the company could borrow today, multiplied by (1 − tax rate), because interest is tax-deductible.
3. Weights. Market capitalization and debt, at market value, not book value.
A note about Kaplio. In the Valuation tab of every stock page, "What the price is pricing in" runs the DCF in reverse, and its WACC "comes from CAPM (3.8% + beta × 5%, floor 7%)," with 2.5% terminal growth. That's a fixed convention for comparing companies with one another; when you build your own DCF, use the day's risk-free rate. You'll see in the example that the difference isn't small.
Formula
Enterprise value = Σ FCFt / (1 + WACC)^t, for t = 1 to n, + TV / (1 + WACC)^n
TV with Gordon = FCFn × (1 + g) / (WACC − g)
TV with an exit multiple = Multiple × year-n figure (EBITDA, operating income or FCF)
Perpetual growth implied by an FCF multiple: g = (Multiple × WACC − 1) / (Multiple + 1)
WACC = E / (E + D) × Ke + D / (E + D) × Kd × (1 − t)
Ke = Risk-free rate + Beta × Market risk premium
Terminal value consistency: required reinvestment = g / ROIC; terminal FCF = NOPAT × (1 − g / ROIC)
Value per share = (Enterprise value − Net debt) / Number of shares
Example
The table below shows the free cash flow yield (free cash flow divided by market cap) of four payments companies: Visa, Mastercard, PayPal and Global Payments. Read it as the inverse of a multiple: 3% is like paying about 33 times free cash flow; 10%, about 10 times. A low yield means the price already bakes in a lot of growth, in other words, a lot of terminal value.
Before you look: what annual free cash flow growth do you think Visa's price implies today: 5%, 10% or 20%? The answer is in step 7.
Full valuation: Visa, from its 10-K for fiscal 2025 (fiscal year ended September 30, 2025; millions of dollars)
Step 1. Starting free cash flow. Operating cash flow of 23,059 minus 1,482 of capital expenditure on property, equipment and software: $21,577 million in fiscal 2025. A year earlier it was 18,693 (19,950 − 1,257), and in fiscal 2021, 14,522 (15,227 − 705). Visa barely needs to invest: capex is just 6.4% of operating cash flow. One catch: in fiscal 2025 it paid its employees $897 million in stock, which doesn't reduce cash but does dilute shareholders. Subtract it and free cash flow drops to 20,680.
Step 2. Explicit growth. Revenue went from $24,105 million in fiscal 2021 to 40,000 in fiscal 2025: 13.5% a year. Free cash flow grew 10.4% a year. We use 10% for five years.
Step 3. The WACC. The 10-year Treasury yielded 5.28% on October 2, 2026. For beta we use one we calculated ourselves from 60 monthly returns, 2021 to 2025, against the S&P 500: 0.82 (the one on the stock page may differ, because it uses a different window). With a 5% premium, the cost of equity is 5.28 + 0.82 × 5 = 9.4%. Debt: $25,171 million at September 30, 2025. Its $589 million of interest expense in fiscal 2025 is only 2.3% of that debt, but that's the coupon on bonds issued when rates were low; borrowing today would cost more. We assume 5.9% (the Treasury yield plus 0.6 points) and, with a 17.1% tax rate (4,136 of taxes on 24,194 of pre-tax income), 4.9% after tax. Weights: 1,966 million diluted Class A shares on an as-converted basis (fiscal 2025 average) × $360.66 = $709,058 million of market cap, 96.6% of the total. WACC = 0.966 × 9.4% + 0.034 × 4.9% ≈ 9.2%.
Step 4. Projection and discounting.
| Year | FCF | 1.092^t | Present value |
|---|---|---|---|
| 1 | 23,735 | 1.092 | 21,735 |
| 2 | 26,108 | 1.192 | 21,894 |
| 3 | 28,719 | 1.302 | 22,055 |
| 4 | 31,591 | 1.422 | 22,216 |
| 5 | 34,750 | 1.553 | 22,379 |
Step 5. Terminal value with Gordon (g = 3%): 34,750 × 1.03 / (0.092 − 0.03) = $577,298 million; discounted to today, 371,781. Enterprise value: 482,060. Net debt: 25,171 of debt − 17,164 of cash − 1,833 of short-term investments = 6,174. Equity value: $475,886 million; divided by 1,966 million shares, about $242. Terminal value is 77% of enterprise value.
Step 6. Terminal value with an exit multiple. Suppose that in year 5 Visa trades at 25 times its free cash flow, a lower multiple than today's. Terminal value: 34,750 × 25 = 868,749; discounted to today, 559,476. Result: about $338 a share, and terminal value now makes up 84%. Which one is right? Run it through the formula: 25 times with a 9.2% WACC is equivalent to perpetual growth of 5.0%, faster than the economy can grow forever. The other way around, Gordon's 3% is equivalent to an exit multiple of 16.6 times. Today Visa trades at about 33 times its free cash flow (enterprise value of $715,232 million divided by 21,577).
Step 7. What the price is pricing in. With a 9.2% WACC and a g of 3%, $360.66 requires free cash flow to grow 19.9% a year for five straight years. If you stretch the 10% growth period to ten years, the value rises to about $307. And if you use the stock page's convention (3.8% + 0.82 × 5 = 7.9%), five years gives you about $309, and ten, about $399. Same business, same accounts: anywhere from $242 to $399 depending on two assumptions.
Step 8. Is the terminal value consistent? Perpetual growth requires reinvestment. With Visa's fiscal 2025 ROIC of 31.5% (operating income of 23,994 × (1 − 0.171) = 19,892 over 37,909 of equity + 25,171 of debt), growing 3% means reinvesting 3 / 31.5 = 9.5% of NOPAT. If in year 6 you apply that formula to NOPAT instead of free cash flow, terminal value drops from 577,298 to 481,589 million, and the share from $242 to about $211. Why? Because in fiscal 2025 Visa's free cash flow (21,577) exceeded its NOPAT: 897 million of stock-based compensation that doesn't reduce cash, plus other non-cash adjustments (depreciation and amortization, 1,220 million, was actually below capex, 1,482). That can't go on forever.
Step 9. Your verdict. No answer key here: apply the scorecard at the end.
Real-data example
| Company | Ticker | FCF yield |
|---|---|---|
| Visa Inc. | V | 3.1% |
| Mastercard Incorporated | MA | 3.4% |
| PayPal Holdings, Inc. | PYPL | 14.6% |
| Global Payments Inc. | GPN | 4.1% |
How to read it
How to read it
Sensitivity of Visa's value per share (five years at 10%, in dollars):
| g \ WACC | 8.0% | 8.5% | 9.2% | 10.0% | 10.5% |
|---|---|---|---|---|---|
| 2.0% | 259 | 239 | 214 | 192 | 180 |
| 2.5% | 279 | 255 | 227 | 202 | 188 |
| 3.0% | 303 | 274 | 242 | 213 | 198 |
| 3.5% | 332 | 297 | 260 | 226 | 210 |
Half a point of WACC moves the value more than half a point of g. That's why the discount rate is the first thing to debate.
Rough ranges for reading the weight of terminal value (not a Kaplio rule):
| Terminal value weight | What it tells you |
|---|---|
| below 60% | a mature company or a high discount rate: the value depends mostly on what you can already see |
| 60-80% | normal for a stable company that's growing |
| above 80% | you're mostly valuing the long run: stretch the explicit period or revisit g |
By sector: in consumer staples, utilities or infrastructure, a g of 2-2.5%; for a company still growing at double digits, stretch the explicit period before you raise g. Never use a g above the nominal growth rate of the economy. For banks and insurers, a free cash flow DCF doesn't apply, as you saw in lesson 12.
Pitfalls and limitations
1. The circular exit multiple. Using today's multiple as your exit multiple smuggles the market's optimism into your valuation. Always translate it into its implied g.
2. A g close to the WACC. If the gap shrinks below two or three points, terminal value explodes and any tenth of a point changes your conclusion.
3. The coupon isn't the cost of debt. Visa's 2.3% is history; the cost that matters is what it would pay to borrow today.
4. A short horizon for a growing company. Five years at 10% and then straight down to 3% is an abrupt shift. For Visa, moving to ten years lifts the value from $242 to $307.
5. The shares you count. Visa bought back $18,316 million of stock in fiscal 2025; the year's average is no longer today's share count. Use the latest figure from the 10-Q.
Self-assessment scorecard: nine questions for any DCF
1. Does your starting cash flow come from a normal year, and do you know why?
2. Have you decided whether to subtract stock-based compensation, and do you apply that choice the same way throughout the model?
3. Does your explicit growth rate come from the history of revenue and free cash flow, or from wishful thinking?
4. Is your risk-free rate today's, and does your beta have a stated window and source?
5. Is your cost of debt a market rate, not the coupon?
6. Is your g equal to or below the nominal growth rate of the economy?
7. Have you translated the exit multiple into its implied g, and Gordon's g into its multiple?
8. Is the terminal-year reinvestment consistent with g and with ROIC?
9. Have you built the sensitivity table, and do you know which assumption moves the result most?
Score yourself: one point for every answer you can defend with a figure or a source. Seven or more, and your DCF holds up. Fewer than five, and you shouldn't use it to make decisions. Then compare your number with "What the price is pricing in" on Visa's stock page: if your value lands far away, check your assumptions first. And before you trust a high ROIC in the terminal year, review what ROIC is and whether the company has a durable competitive advantage to protect it. To cross-check against a multiple, look at enterprise value (EV).
Practice on Kaplio
Frequently asked questions
What is terminal value in a DCF?
It's the value of all the cash flow a company will generate after the period you project in a DCF, rolled into a single figure. It usually accounts for 60% to 80% of total value: in the Visa example built on fiscal 2025, 77% with Gordon and 84% with an exit multiple of 25 times.
How do you calculate terminal value in a DCF?
Use the Gordon formula, last year's free cash flow × (1 + g) / (WACC − g), or an exit multiple applied to that year's EBITDA or free cash flow. Then discount it to the present by dividing by (1 + WACC) raised to the number of years. It pays to calculate both and compare them.
What is a good terminal growth rate?
One equal to or below the nominal growth rate of the economy, usually between 2% and 3%, and never close to the WACC, because terminal value then explodes. For consumer staples, utilities or infrastructure, 2-2.5% is typical. If a company is still growing fast, stretch the explicit period instead of raising g.