Which method calculates terminal value assuming constant growth?

The correct choice is the Perpetuity Growth Method, which is used to calculate terminal value by assuming that cash flows will continue to grow at a constant rate indefinitely after a certain point in time. This method involves estimating the cash flows expected to be generated in the final forecasted period and then applying a formula that incorporates the growth rate and a discount rate.

The formula typically used with the Perpetuity Growth Method is:

[ TV = \frac{CF \times (1 + g)}{r - g} ]

where ( TV ) is the terminal value, ( CF ) is the cash flow in the final forecast period, ( g ) is the constant growth rate, and ( r ) is the discount rate. This method is particularly useful in situations where the business is expected to continue generating cash flows at a stable growth rate beyond the explicit forecast period.

Other methods mentioned, such as the Discounted Cash Flow Method, typically involve calculating the present value of future cash flows without explicitly assuming constant growth beyond a set timeframe. The Terminal Earnings Method generally focuses on earnings rather than cash flows, while the Future Profit Method suggests a different approach to estimating future profits rather than following a constant growth model.