Which method is NOT commonly used to calculate terminal value in a DCF?

The direct capitalization method is not typically used in the context of calculating terminal value in a discounted cash flow (DCF) analysis. Terminal value represents the value of a business at the end of the explicit projection period and is crucial for capturing the value beyond that period.

Common approaches for calculating terminal value include the Gordon growth method and the multiples method. The Gordon growth method applies a perpetuity formula, assuming that cash flows will continue to grow at a stable rate indefinitely. Conversely, the multiples method calculates terminal value based on a multiple of financial metrics, like EBITDA or revenue, that is considered appropriate for the company’s sector.

The discounted cash flow method generally refers to the initial valuation method rather than a specific approach to calculating terminal value. Therefore, while it is integral to the DCF analysis, it doesn’t directly define a method for terminal value calculation, especially in contrast to the other specified methods. This differentiation highlights why the direct capitalization method does not align with the standard practices used in terminal value estimation.