What does terminal value represent in a business valuation context?

Terminal value represents the projected value of a business beyond the forecast period, capturing the value of all future cash flows that are expected to occur after the explicit forecast horizon. This concept is crucial in business valuation because it allows analysts to account for the ongoing profitability a company can generate well into the future, especially when the operating environment and growth potential may remain stable or can be reasonably estimated over a long period.

In practice, terminal value is often calculated using methods such as the Gordon Growth Model or exit multiple approaches, which help incorporate the anticipated value of a company's cash flows extending indefinitely into the future. This makes it an essential component in discounted cash flow (DCF) analysis, where it significantly affects the overall valuation outcome.

The other options, while related to asset valuation or specific metrics, do not align with the definition of terminal value in the context of capturing the ongoing cash generation capability of a business beyond the immediate forecasting horizon.