Trouble with DCF terminal value logic

You're definitely not alone! Terminal value trips up a lot of candidates. A good way to think about it:

• Use perpetuity growth when projecting a stable, mature business.
• Use exit multiple when there are good comps available and you want market-based validation.

Both methods should give roughly similar ranges if your assumptions are solid.

To build confidence, practice explaining why you're using a method and not just the math. Try teaching it to someone else or recording yourself.

Totally understandable—this trips up a lot of people, even those who’ve done multiple DCFs. The key to getting comfortable is to break it down into clear principles and then get to the point where you can explain your choices simply, not just model them.

Here’s how you can think through and internalize it better:

1. Perpetuity Growth vs. Exit Multiple:

• Use perpetuity growth when you're modeling a business that is expected to grow steadily into the long term. This is more theoretical, based on long-term macroeconomic assumptions (like GDP growth or inflation). It works well for mature, stable companies.
• Use an exit multiple when you're assuming the company would be sold at the end of the forecast period, and you're using current market comps to estimate the value at that point. This is more market-based and easier to defend with comparables.

What’s important is not choosing the “right” one—they’re both valid—but being clear in your reasoning. In an interview, if you say something like: “For a more mature business with predictable cash flows, I’d lean toward a perpetuity growth approach to reflect continued performance. But for a company likely to be acquired or where comps are strong, an exit multiple might give a better market-aligned estimate,” that’s a strong answer.

2. Mid-year convention:

• This adjusts for the fact that cash flows come in throughout the year, not just at the end. So instead of discounting as if all cash arrives on December 31, you're shifting it back by half a year.
• It’s a technical detail, but you can usually apply it by adjusting the discount periods (e.g., using n - 0.5 instead of n) or using a mid-year WACC adjustment.
• You don’t have to do this in every model, but if you're going deep, mention you apply it when precision matters—especially for longer forecasts or when teaching someone else about time value.

3. WACC tweaks:

• WACC is sensitive to assumptions about capital structure, risk, and market conditions. If a company becomes riskier over time or if you’re changing the capital mix, you might update WACC.
• But usually, in standard DCFs, WACC is held constant unless there's a clear reason to change it.

How to build confidence:

• Take a model you’ve already built and try to explain every assumption out loud to yourself like you're teaching it. Focus on why you're doing something, not just how.
• Practice explaining both terminal value methods to a friend or in mock interviews. Don’t try to sound smart—try to be clear.
• Build the same DCF twice: once with perpetuity growth and once with an exit multiple. Compare the results and write down what assumptions cause the difference.
• Review a company’s public DCF (like in analyst reports) and trace how they got their terminal value. Reverse-engineer their logic.

This is one of those areas where you “learn by teaching.” When you can teach terminal value choices confidently to someone else, even a non-finance person, you’re there. And for interviews, clarity beats complexity every time.