Terminal Growth Rate Calculation

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Terminal Growth Rate Calculator

Calculate Terminal Value using the Gordon Growth Model

Calculated Terminal Value $0.00
Implied Exit Multiple (EV/FCF) 0.0x

Understanding Terminal Growth Rate in DCF Analysis

The Terminal Growth Rate is a critical assumption used in Discounted Cash Flow (DCF) models to determine the value of a company beyond the explicit forecast period (typically 5 to 10 years). This rate represents the constant speed at which the company's Free Cash Flow (FCF) is expected to grow forever.

Because this growth rate is applied to perpetuity, it significantly impacts the final valuation. Small changes in the terminal growth rate can lead to massive swings in the calculated Terminal Value.

The Gordon Growth Model Formula

This calculator utilizes the Gordon Growth Model (Perpetuity Growth Method) to calculate the Terminal Value (TV). The formula is:

TV = [ FCFn × (1 + g) ] / ( WACC – g )

Where:

  • FCFn: The Free Cash Flow in the final year of the projection period.
  • g: The Terminal Growth Rate (perpetual growth assumption).
  • WACC: The Weighted Average Cost of Capital (discount rate).

How to Choose a Terminal Growth Rate

Selecting an appropriate growth rate is more art than science, but financial analysts generally adhere to specific constraints to ensure the valuation is realistic:

  • The GDP Cap: A company cannot grow faster than the overall economy forever. If it did, it would eventually become the entire economy. Therefore, the terminal growth rate should typically be capped at the country's long-term GDP growth rate (usually 2% to 3%).
  • Inflation Floor: In nominal terms, a stable company should at least grow with inflation. Thus, the rate is often set between the inflation rate and the GDP growth rate.
  • WACC Constraint: The growth rate (g) must strictly be lower than the WACC. If g is greater than or equal to WACC, the formula breaks mathematically (implying infinite value).

Interpreting the Results

Terminal Value: This is the estimated lump-sum value of the company at the end of the projection period. To use this in a valuation today, this figure must be discounted back to the present day using the WACC.

Implied Exit Multiple: This metric helps verify if your assumptions are reasonable. It calculates what multiple of the final year's cash flow the Terminal Value represents. If this multiple looks significantly higher than current trading multiples of comparable companies, your growth rate assumption might be too aggressive.

function calculateTerminalValue() { // Get input elements by ID var lastFcfInput = document.getElementById("lastFcf"); var waccInput = document.getElementById("wacc"); var growthRateInput = document.getElementById("growthRate"); var resultContainer = document.getElementById("resultContainer"); var errorMsg = document.getElementById("errorMsg"); // Output elements var displayTV = document.getElementById("displayTV"); var displayMultiple = document.getElementById("displayMultiple"); // Parse values var fcf = parseFloat(lastFcfInput.value); var waccPercent = parseFloat(waccInput.value); var growthRatePercent = parseFloat(growthRateInput.value); // Reset display resultContainer.style.display = "none"; errorMsg.style.display = "none"; // Validation if (isNaN(fcf) || isNaN(waccPercent) || isNaN(growthRatePercent)) { errorMsg.innerText = "Please enter valid numbers for all fields."; errorMsg.style.display = "block"; return; } if (waccPercent <= growthRatePercent) { errorMsg.innerText = "Mathematical Error: WACC must be greater than the Terminal Growth Rate."; errorMsg.style.display = "block"; return; } // Logic (Gordon Growth Model) // Convert percentages to decimals var r = waccPercent / 100; var g = growthRatePercent / 100; // Formula: TV = (FCF * (1 + g)) / (r – g) var numerator = fcf * (1 + g); var denominator = r – g; var terminalValue = numerator / denominator; // Calculate Implied Multiple: TV / FCF // Note: Some analysts use TV / (FCF * (1+g)), others use TV / FCF. // Standard exit multiple usually refers to TV / Final Year Metric. var impliedMultiple = 0; if (fcf !== 0) { impliedMultiple = terminalValue / fcf; } // Formatting Output var formatter = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD', minimumFractionDigits: 2, maximumFractionDigits: 2 }); displayTV.innerText = formatter.format(terminalValue); displayMultiple.innerText = impliedMultiple.toFixed(2) + "x"; // Show Results resultContainer.style.display = "block"; }

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