Terminal values in two-stage models

[Chasej]

I feel like I used to know this but it has escaped me since I restarted Level II.
When do you discount the terminal value on its own in say year 5 vs. when do you add it to the last value in year 4?
What is the discerning factor here?

 

[hock]

The objective of the first stage is to bring the FCFs from the proforma to time0 for the discounted FCF.
For stage two, you use the growth rate to find the FCF for t+1 (lets say yr 5) and calculate the present value (at yr 4) as if it was paid in perpetuity, using “Adj WACC - Growth” as the discount rate. Remember, this is the PV at year 4 so it must be pulled back to like-terms by bringing it back to time0.
I guess itd be possible to bring stage one to time4 then calculate stage two at time4, then bring both back to the present value at the same time but that seems like a lot more work with a higher chance to make mistakes.
Is this what you were asking or did I misunderstand?

 

[edupristine]

Suppose the terminal value is calculated for year 6 and further cash flows. Remember this would be the value at the end of year 5 and not year 6
Now there can be 2 methods:
1. Terminal value can either be added to year 5 cash flow and then PV of the resulting 5 cash flows can be found for value of operations or,
2. Terminal value’s PV can be found and also the 5 other cash flows PV can be found separately and added.
The Ans will be same from both methods, however the second method is somewhat cumbersome and has extra steps that can be eliminated using 1st method and I suggest that you use 1st method in exams.
All the best, Have a nice day