What is the Gordon Growth Model's formula for terminal value?

The Gordon Growth Model’s formula for terminal value is indeed represented by the formula that calculates terminal value based on the future cash flows of a company. In this model, terminal value (TV) is derived by taking the projected free cash flow (FCF) of the last forecasted period and applying a growth rate (g) to it. This adjusted cash flow is then divided by the difference between the discount rate (r) and the growth rate (g).

The rationale behind this formula is to estimate the present value of a company’s cash flows that are expected to grow at a stable rate indefinitely after the forecast period. The formula captures the concept that even after the explicit forecast period, a company will continue to generate cash flows that grow at a constant rate. The discount rate reflects the risk and the opportunity cost of capital, while the growth rate is a long-term sustainable growth estimate.

This approach is fundamental in financial modeling and valuation, especially in the context of discounted cash flow analysis, where capturing the terminal value is critical to assessing the value of a firm beyond the forecast horizon.

The other options do not correctly reflect how terminal value is calculated in the Gordon Growth Model, which is specifically designed for this type of valuation.