Terminal Capitalization Rate

The terminal capitalization rate (TCR) is the rate at which a company's cash flows are discounted to arrive at its terminal value. The terminal value is the value of the company at the end of the projection period. The TCR is used to estimate the value of a company's future cash flows that occur after the projection period.

The TCR is calculated by dividing the terminal value by the company's expected cash flow in the final year of the projection period. The terminal value is typically calculated using a discounted cash flow (DCF) model. The DCF model estimates the value of a company by discounting its future cash flows to the present value.

The TCR is an important input into the DCF model. The higher the TCR, the lower the terminal value and the lower the company's overall value. The lower the TCR, the higher the terminal value and the higher the company's overall value.

The TCR is based on a number of factors, including the company's risk, growth prospects, and the current market conditions. The risk of a company is determined by its financial strength, its competitive position, and the overall economic environment. The growth prospects of a company are determined by its product or service offerings, its market share, and its ability to innovate. The current market conditions are determined by the interest rates, inflation, and the overall economic growth.

The TCR is a subjective estimate. There is no one right answer. The TCR should be based on the best available information and should be adjusted as new information becomes available.

The TCR is an important tool for valuing companies. It can be used to compare companies with different growth prospects and to make investment decisions.