## Fair value is negative in the model

#### Case

The DCF fair value (and EVA as well) are negative even though the estimates are quite positive and thus the cumulative value of cash flows should be much higher than the value of debt. However, the value of cash flow in terminal year seems to be negative.

#### Reason

The reason is most likely that your terminal growth rate (net sales growth percentage in the last estimate year) is greater than WACC. The terminal value of cash flows are calculated with the help of so called "Gordon model" and it is both mathematically and practically an unfeasible assumption that the growth rate would be greater - or even close to - WACC.

Gordon has constructed his formula to calculate the value of a firm that pays an infinite stream of dividends (cash flow) when the dividend is growing at certain pace. Gordon model states that value of an eternal cash flow = cash flow / (r - g) , where g = growth rate and r= discount rate. Thereby you cannot of course have g > r as it would produce a negative output. Actually it is not a sensible assumption that your growth rate (g) would be even very close to discount rate (r) as you would get an infinite value. And of course in real life there has not been any case where a company would have increased its dividend/profits with such growth rate even for decades, not to mention eternally.

#### Solution

Drop your terminal growth rate to a more sensible level. The suitable level is discussed separately in general instructions section Estimating long-term growth and profitability.