What method is recommended for determining terminal value when working with a limited peer set?

The perpetuity growth method is a widely accepted approach for determining terminal value, especially when dealing with a limited set of comparable companies. This method assumes that a company will continue to generate cash flows indefinitely and that those cash flows will grow at a steady rate after a specific projection period.

In scenarios where there are only a few peers available for comparison, using the perpetuity growth method allows analysts to estimate the terminal value based on certain growth assumptions that may be applicable to the company in question. This can be more reliable than attempting to derive a terminal value from a limited number of comparable companies, which might not reflect the full market potential or variations in performance.

The perpetuity growth model typically involves calculating the cash flow in the last projected year and then applying a growth rate to derive the terminal cash flow. This approach can smooth out fluctuations and uncertainties that might come from comparables, providing a clear and logical foundation for estimating the long-term value of the company.