As Holthausen and Zmijewski emphasize, terminal value often represents . Small changes in TV assumptions can produce massive valuation errors, making this chapter one of the most critical in the valuation process. The Two Dominant Approaches to Terminal Value Chapter 17 systematically evaluates the two primary methods for estimating TV: 1. The Perpetuity Growth Method (Gordon Growth Model) This method assumes that after the explicit forecast period, the firm’s free cash flows grow at a constant, perpetual rate ( g ). The formula is straightforward:
[ TV_n = \fracFCF_n+1WACC - g = \fracNOPLAT_n+1 \times (1 - g / RONIC)WACC - g ] corporate valuation holthausen pdf 17
In the long run, competition drives excess returns to zero. Therefore, the terminal period should assume that the firm’s converges to its Weighted Average Cost of Capital (WACC) . If RONIC equals WACC, further growth adds no value — it is “value-neutral” growth. If RONIC persistently exceeds WACC, the firm enjoys a competitive advantage, and a higher terminal multiple is justified, but such advantages rarely last forever. As Holthausen and Zmijewski emphasize, terminal value often
I cannot directly provide or link to a specific PDF file (such as a Chapter 17 PDF by Holthausen & Zmijewski) due to copyright restrictions. However, I can offer a of the core concepts typically covered in Chapter 17 of the well-known corporate valuation text "Corporate Valuation: Theory, Evidence, and Practice" by Robert W. Holthausen and Mark E. Zmijewski . The Perpetuity Growth Method (Gordon Growth Model) This
[ TV_n = \textMultiple \times \textTerminal Year Metric (e.g., EBITDA) ]
A valuation that ignores the link between growth, ROIC, and WACC is little more than a spreadsheet illusion. By mastering the concepts in Chapter 17 — conservative growth rates, competitive fade, and cross-method consistency — analysts can avoid the most common and costly valuation errors. In the end, terminal value is where financial theory meets pragmatic judgment, and no chapter in the Holthausen & Zmijewski text makes that clearer. If you are looking for the original by Holthausen & Zmijewski, please check your institutional library access, Google Scholar, or platforms like SSRN or ResearchGate for author-uploaded preprints. Some universities provide access through databases like EBSCO or ProQuest . Always respect copyright laws.