Question

Can Terminal value be negative?

Answer 1

It can be negative if company is assumed to go in huge losses or degrade or simply shut down n vanish in the coming years

Answer 2

Thanks for the reply, but if the company is in huge losses and declares bankruptcy, it pays to its debtors only to the extent of its assets implies the terminal value can only go to zero not negative. No?

Answer 3

It can be negative.. it is not based on the present condition but the future expectation.. rare but some expect a company to simply vanish

Answer 4

Srihath,
The concept of DCF and terminal value assumes that the company or project is a going concern - which means it will exist for a long time (till infinity theoretically). Based on this the terminal value (positive) is calculated and divided by a rate which is (r-g) where r is the return on equity and g is the long term growth rate.
In practice when someone is calculating terminal value for a company which is functioning well the terminal value will generally be positive. There is no case of it being negative, except when in future (say after x years) the company closes down its operations due to unforeseen circumstances. When doing a valuation exercise a negative terminal value doesnt exist practically. If such a valuation exists (say for example) then it may be a case of a business which is becoming obsolete or defunct. For example products like typewriter, pager, etc have become obsolete today.

Answer 5

Thanks.