What is the formula for terminal value in the Gordon Growth Model?

The terminal value in the Gordon Growth Model is used to estimate the value of an investment at the end of a specified forecast period, assuming that cash flows will continue to grow at a stable rate indefinitely. The correct formula, which you identified, calculates terminal value as follows:

Terminal Value (TV) = (FCF * (1 + g)) / (r - g)

In this formula, FCF represents the free cash flow expected in the first year after the forecast period, g is the growth rate of the free cash flows, and r is the discount rate.

This formula is derived from the concept of perpetuity, which assumes that the cash flows will continue indefinitely. The (1 + g) component accounts for the anticipated growth in cash flows during the first year of perpetuity, while (r - g) reflects the required rate of return minus the growth rate. If g is less than r, this formula allows for a sensible calculation of value, factoring in both future growth and the time value of money.

The other options do not correctly represent this relationship or apply the concepts of growth and discounting in a manner manageable in this context. Therefore, the selection of this formula accurately captures the fundamental principles behind the Gordon Growth Model for terminal