In the context of a constant growth model, what should be included when calculating terminal value?

In the context of a constant growth model, calculating terminal value is essential as it captures the value of an investment beyond the explicit forecasting period. The correct answer focuses on including the value of future cash flows and sales at the horizon date T.

This approach is grounded in the finance principle that the terminal value represents the expected value of an investment at a future date when the cash flows are expected to grow at a constant rate indefinitely. It typically involves estimating the future cash flows expected to be generated in perpetuity and discounting them back to the present value to reflect their worth today.

When you consider the terminal value as it relates to future cash flows, it incorporates not only the expected cash generated in the final year of the explicit forecast period but also the ongoing operational value of the business. This is crucial in assessing the long-term sustainability and performance of a firm.

Other options would not provide a complete picture or may miss the relevant components necessary for a thorough terminal value calculation:

• Including growth rates and capital gains does not directly provide the cash flow specifics needed for terminal value calculations.

• Mentioning sale prices at the beginning of the forecast period does not consider the continuous growth expected after that point.

• Limiting the calculation to expected dividend payments may overlook other