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Terminal Value CalculatorDCF / Gordon Growth / Exit Multiple
Input discipline

Free Cash Flow vs EBITDA

Gordon Growth wants free cash flow in the numerator, not EBITDA. The exit multiple method wants EBITDA. Mixing them up silently overstates terminal value by the amount of capex plus working-capital investment the business needs to keep growing.

Direct answer
Free cash flow to the firm (FCFF) equals EBITDA minus cash taxes on EBIT, minus capex, minus increase in working capital. EBITDA is not free cash flow. Putting EBITDA into the Gordon Growth numerator and discounting it at WACC ignores the cash cost of growth. Capital-intensive businesses are most exposed to this error.
Formula

The bridge from EBITDA to FCFF

Free cash flow to the firm (FCFF)
FCFF = EBITDA - Cash Taxes on EBIT - Capex - delta Working Capital

Each subtraction matters. Cash taxes on EBIT (not on net income) reflect that interest is not a deductible step at the firm-level. Capex includes maintenance plus growth capex. Working-capital increase ties up cash that is not available to capital providers.

Source: CFA Program Curriculum 2024, Level II, Free Cash Flow Valuation reading; Damodaran, Investment Valuation 3rd ed., Chapter 14Last verified June 2026.
Why it matters

The capital-intensive trap

Software business

Capex modest, working capital sometimes negative (deferred revenue). EBITDA and FCFF run close. Substituting EBITDA into Gordon Growth introduces a smaller error.

Telecom or utility

Capex can equal half of EBITDA. Substituting EBITDA into Gordon Growth overstates terminal value materially. Use FCFF explicitly.

Related

Where to go next

Last verified June 2026. Source: CFA Program Curriculum 2024; Damodaran Investment Valuation 3rd ed.