Calculating Terminal Growth Rate

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Terminal Growth Rate & Terminal Value Calculator

Calculation Results

Estimated Terminal Value: $0.00

What is the Terminal Growth Rate?

The Terminal Growth Rate is the constant rate at which a company's free cash flow (FCF) is expected to grow indefinitely beyond a specific forecast period. In Discounted Cash Flow (DCF) analysis, it is impossible to project financial statements forever. Instead, analysts project the company's performance for 5 to 10 years and then assume the business reaches a "steady state," represented by the Terminal Value.

The Gordon Growth Method Formula

This calculator uses the Gordon Growth Model (also known as the Perpetuity Growth Model) to determine the terminal value. The formula is:

TV = [FCFn × (1 + g)] / (WACC – g)
  • TV: Terminal Value
  • FCFn: Free Cash Flow in the final projected year
  • g: Terminal Growth Rate (Perpetual Growth Rate)
  • WACC: Weighted Average Cost of Capital (Discount Rate)

How to Choose a Realistic Growth Rate

In financial modeling, the terminal growth rate should typically align with the long-term inflation rate or the GDP growth rate of the country where the company operates. Generally, this rate ranges between 2% and 3%. If you use a growth rate higher than the overall economy's growth rate, you are theoretically assuming that the company will eventually become larger than the entire economy, which is mathematically impossible.

Practical Example

Imagine a tech company with a final year projected Free Cash Flow of $1,000,000. If the WACC is determined to be 9% and the long-term terminal growth rate is estimated at 2.5%:

  1. Calculate the numerator: $1,000,000 × (1 + 0.025) = $1,025,000
  2. Calculate the denominator: 0.09 – 0.025 = 0.065
  3. Terminal Value = $1,025,000 / 0.065 = $15,769,230.77

This $15.77 million represents the value of all cash flows beyond the projection period, which must then be discounted back to the present value.

function calculateTerminalValue() { var fcf = parseFloat(document.getElementById('fcf_value').value); var wacc = parseFloat(document.getElementById('wacc_rate').value) / 100; var growth = parseFloat(document.getElementById('growth_rate').value) / 100; var resultContainer = document.getElementById('tgr-result-container'); var resultDisplay = document.getElementById('terminal_value_result'); var noteDisplay = document.getElementById('result_note'); if (isNaN(fcf) || isNaN(wacc) || isNaN(growth)) { alert("Please enter valid numerical values for all fields."); return; } if (wacc <= growth) { alert("The Discount Rate (WACC) must be higher than the Terminal Growth Rate to reach a finite value."); resultContainer.style.display = "none"; return; } // Formula: TV = (FCF * (1 + g)) / (WACC – g) var terminalValue = (fcf * (1 + growth)) / (wacc – growth); // Format results var formattedValue = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD', minimumFractionDigits: 2 }).format(terminalValue); resultDisplay.innerHTML = formattedValue; var impliedMultiple = terminalValue / fcf; noteDisplay.innerHTML = "This results in an implied Exit Multiple of " + impliedMultiple.toFixed(2) + "x the final year FCF."; resultContainer.style.display = "block"; resultContainer.scrollIntoView({ behavior: 'smooth', block: 'nearest' }); }

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