6.2·8 min read

The Perpetuity Growth Method

Grow the final cash flow at a modest perpetual rate, then apply Gordon Growth. The rate should be GDP-like - 2–4%.

By the end you can

✓Apply the perpetuity growth terminal value formula
✓Choose a defensible perpetual growth rate
✓Discount the terminal value back to present value

This is the formula from Module 1, now pointed at the company's final-year :

\text{TV} = \dfrac{\text{FCF}_t \times (1 + g)}{\text{WACC} - g}

FCF_t = final explicit-year UFCF; g = perpetual growth rate. The numerator is next year's (terminal) cash flow.

Pick g like an adult

The perpetual growth rate must be sustainable forever - so it can't exceed long-run economic growth. In practice 2–4%, roughly in line with GDP. A perpetual growth rate of 7% implies the company eventually becomes larger than the world economy. Don't do that.

Worked example · Perpetuity growth TV

Given