Would a longer forecast reduce the terminal share?

Yes, and it usually buys less honesty than it appears to. Extending to ten years moves value out of the terminal formula and into the forecast, but the extra years are themselves guesses, and guesses about years six to ten are not obviously better than a growth assumption covering the same period. What genuinely reduces the terminal share is a business whose cash flows are visibly finite — a mine, a patent, a lease — where the model can end rather than continue forever. For an ordinary operating company, a large terminal share is the honest reflection of a company expected to keep existing.

Why subtract net debt at the end?

Because the cash flows being discounted belong to everyone who financed the business, lenders included. The result of the discounting is therefore what the whole enterprise is worth, and shareholders own only what remains after the lenders are repaid. Subtracting $40M of net debt from $266.6M leaves $226.6M for the equity, or $9.06 across 25 million shares. Netting cash against debt reflects that cash on the balance sheet could be used to repay borrowings tomorrow — which is why a company sitting on more cash than debt has a negative net debt that adds to the equity value rather than subtracting from it.

Three Quarters of a Valuation Comes From Year Six Onwards

Published 10/30/2026 · 3 min read · Finance calculators

Camille Laurent — Finance writer at OneKitly

Tax · Personal finance

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In short

Take the standard exercise: five years of free cash flow rising from $12M to $21.5M, a 9 % discount rate, 2 % growth thereafter, $40M of net debt and 25 million shares. The forecast years are worth $63.0M in today's money. The terminal value — a single formula standing in for every year after the fifth — is worth $203.6M once discounted, which is 76.4 % of the $266.6M enterprise value. After subtracting debt, the answer is $9.06 a share. Three quarters of that figure rests on two numbers nobody researched: a growth rate assumed to hold forever, and a discount rate chosen by convention.

A five-year forecast contributes $63M of a $267M enterprise value. The other $204M is the terminal value — the part nobody forecast at all.

The terminal value is a division by a small number

The formula divides the final year's cash flow by the discount rate minus the growth rate. With 9 % and 2 % the divisor is 7 points; move growth to 3 % and it becomes 6 points, a denominator smaller by one seventh and therefore a terminal value larger by 17 %. The sensitivity is not a flaw in anyone's spreadsheet, it is what dividing by a difference does. And the difference is small precisely because a sensible long-run growth rate must be below the discount rate — otherwise the formula returns a negative number or an infinite one, and the model breaks rather than warning you.

What to do with a model this sensitive

Not abandon it — the discipline of writing down the cash a business will produce is worth the exercise even when the answer is soft. What the sensitivity argues against is the single number. Run the model across a grid of rates and growth assumptions and report the range: here it spans $6.56 to $10.51, a spread of 60 % between plausible corners. A negotiation conducted over that range is honest; one conducted over $9.06 pretends to a precision the arithmetic cannot support. Analysts who present a point estimate and a target price are usually presenting the midpoint of a range they chose not to show.

Value per share

How two assumptions move the answer
Assumption	Value per share	Change
Base: 9 % rate, 2 % growth	$9.06	—
Growth 3 % instead of 2 %	$10.51	+16 %
Growth 0 % instead of 2 %	$7.13	−21 %
Rate 11 % instead of 9 %	$6.56	−28 %

Worked with our own calculator

DCF calculator (discounted cash flow)

Given

Projected free cash flow, one per year: 12, 14, 16.5
Discount rate (WACC): 8.1%
Perpetual growth rate after the forecast: 1.8%
Net debt (debt minus cash): 20
Shares outstanding: 1

Result

Present value of the forecast cash flows: $36.14
Terminal value (Gordon growth): $266.62
Present value of the terminal value: $211.06
Share of the valuation coming from the terminal value: 85.38%
Enterprise value: $247.21
Equity value: $227.21
Value per share: $227.21

These figures are produced by the calculator below, not typed in by hand — they are recomputed whenever the tool changes.

Run it on your own figures →

Frequently asked questions

Would a longer forecast reduce the terminal share?: Yes, and it usually buys less honesty than it appears to. Extending to ten years moves value out of the terminal formula and into the forecast, but the extra years are themselves guesses, and guesses about years six to ten are not obviously better than a growth assumption covering the same period. What genuinely reduces the terminal share is a business whose cash flows are visibly finite — a mine, a patent, a lease — where the model can end rather than continue forever. For an ordinary operating company, a large terminal share is the honest reflection of a company expected to keep existing.
Why subtract net debt at the end?: Because the cash flows being discounted belong to everyone who financed the business, lenders included. The result of the discounting is therefore what the whole enterprise is worth, and shareholders own only what remains after the lenders are repaid. Subtracting $40M of net debt from $266.6M leaves $226.6M for the equity, or $9.06 across 25 million shares. Netting cash against debt reflects that cash on the balance sheet could be used to repay borrowings tomorrow — which is why a company sitting on more cash than debt has a negative net debt that adds to the equity value rather than subtracting from it.

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