Reference

Glossary

Definitions of the terms used across this site. Every term references at least one named textbook source on the methodology page.

Terms

20 definitions

Terminal value (TV): The present value of all expected free cash flows after the explicit DCF forecast horizon. In a typical 5-to-10-year DCF, TV accounts for 60 to 80 percent of total enterprise value.
Gordon Growth Model: Closed-form terminal-value formula: TV at end of year n equals FCF at year n+1 divided by (WACC minus g). Assumes a constant perpetuity growth rate.
Exit multiple method: Terminal-value method that applies a market multiple (typically EV/EBITDA) to a terminal-year metric to produce TV at end of year n.
WACC (weighted average cost of capital): Blended discount rate combining cost of equity and cost of debt, weighted by target capital structure and adjusted for tax shield on debt.
CAPM (capital asset pricing model): Cost-of-equity formula. Risk-free rate plus levered beta times equity risk premium.
Beta: Sensitivity of a stock's returns to the broad market. Levered beta reflects company-specific capital structure; unlevered beta is the asset-level sensitivity. Damodaran publishes industry tables.
Equity risk premium (ERP): Expected return on the broad equity market in excess of the risk-free rate. Damodaran publishes monthly implied estimates.
FCFF (free cash flow to the firm): Cash flow available to all capital providers. EBITDA minus cash taxes on EBIT, minus capex, minus increase in working capital.
FCFE (free cash flow to equity): Cash flow available to equity holders after debt-service. FCFF minus after-tax interest plus net new borrowing.
EBITDA: Earnings before interest, taxes, depreciation and amortisation. A proxy for operating cash flow that ignores capex, working capital and taxes.
Normalised EBITDA: Reported EBITDA adjusted for one-off and non-recurring items to reflect run-rate earnings power.
Perpetuity growth rate (g): Assumed constant growth rate applied to free cash flow in the Gordon Growth formula. Should sit at or below long-run nominal GDP growth.
ROIC (return on invested capital): NOPAT divided by invested capital. Measures the return the business earns on the dollars committed to operations.
Reinvestment rate: Proportion of NOPAT reinvested back into the business. In steady state equals g divided by ROIC.
Mid-year convention: DCF discounting convention that treats each year's cash flow as if received at the midpoint of the year (t minus 0.5) rather than year-end (t).
Fade period: Transition window in a three-stage DCF where growth (and sometimes ROIC) decays from the high-growth rate to the stable-growth rate.
H-model: Closed-form linear-fade alternative to a three-stage DCF. Growth fades linearly from a high to a stable rate over 2H years.
Two-stage DCF: DCF with an explicit high-growth forecast followed by a Gordon Growth terminal value at the seam.
Three-stage DCF: DCF with explicit high-growth, an explicit fade-period, then a Gordon Growth terminal value.
Key value driver formula: Koller reformulation of Gordon Growth: TV equals NOPAT times (1 minus g divided by ROIC), divided by (WACC minus g). Makes growth, ROIC and reinvestment explicit.

Last verified June 2026. Definitions track the Damodaran (Investment Valuation, 3rd ed.), Koller et al. (Valuation, 7th ed.), and CFA Program Curriculum 2024 conventions. See methodology for the full source registry.