How to Calculate Growth Rate for Terminal Value

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Implied Terminal Growth Rate Calculator

Calculate the implied perpetuity growth rate derived from a specific Terminal Value, WACC, and Final Year Free Cash Flow.

The estimated value at the end of the forecast period.
Free Cash Flow in the last forecasted year ($FCF_n$).
Weighted Average Cost of Capital.
Implied Perpetuity Growth Rate (g): 0.00%
function calculateImpliedGrowth() { var tvInput = document.getElementById('terminalValue'); var fcfInput = document.getElementById('finalFcf'); var waccInput = document.getElementById('wacc'); var resultDiv = document.getElementById('resultsArea'); var growthDisplay = document.getElementById('resultGrowthRate'); var sanityCheck = document.getElementById('sanityCheck'); var tv = parseFloat(tvInput.value); var fcf = parseFloat(fcfInput.value); var wacc = parseFloat(waccInput.value) / 100; if (isNaN(tv) || isNaN(fcf) || isNaN(wacc)) { alert("Please enter valid numbers for all fields."); return; } if (tv <= 0 || fcf wacc * 100) { message = "⚠️ Mathematical Warning: The growth rate exceeds WACC. This implies the Terminal Value formula would result in infinity/negative numbers in a standard DCF. Re-check your inputs."; bgColor = "#f8d7da"; textColor = "#721c24"; } else if (gPercentage > 5) { message = "⚠️ High Growth Warning: A perpetual growth rate of " + gPercentage.toFixed(2) + "% is likely unrealistic as it exceeds long-term global GDP growth."; bgColor = "#fff3cd"; textColor = "#856404"; } else if (gPercentage < 0) { message = "📉 Negative Growth: The implied growth rate is negative, suggesting the company will shrink in perpetuity."; bgColor = "#d1ecf1"; textColor = "#0c5460"; } else { message = "✅ Reasonable Range: This growth rate appears within standard economic parameters (typically 2-4%)."; bgColor = "#d4edda"; textColor = "#155724"; } sanityCheck.innerHTML = message; sanityCheck.style.backgroundColor = bgColor; sanityCheck.style.color = textColor; }

How to Calculate Growth Rate for Terminal Value

In financial valuation, specifically within a Discounted Cash Flow (DCF) model, the Terminal Value (TV) represents the value of a business beyond the explicit forecast period. Calculating the "growth rate" ($g$) for this value is a critical step that requires understanding the relationship between cash flow, risk (WACC), and value.

While analysts often *assume* a growth rate (typically based on GDP), it is equally important to calculate the Implied Growth Rate when a Terminal Value is derived using the "Exit Multiple" method. This helps validate if your valuation assumptions are realistic.

The Mathematical Formula

The calculation is based on the Gordon Growth Model (Perpetuity Growth Model). If we solve the standard TV formula for $g$ (growth rate), we get:

g = (TV × WACC – FCFn) / (TV + FCFn)
  • TV: Terminal Value (estimated future value).
  • WACC: Weighted Average Cost of Capital (Discount Rate).
  • FCFn: Free Cash Flow in the final year of the projection period.

Why Calculate Implied Growth?

Valuation is often a triangulation exercise. Analysts frequently calculate Terminal Value using an EBITDA multiple (e.g., selling the company for 10x EBITDA in Year 5). By plugging that dollar value into the calculator above, you can see what perpetual growth rate that exit price implies.

Example Scenario:

  • If your Exit Multiple method gives a TV of $100M.
  • Your Last Year FCF is $5M.
  • Your WACC is 10%.
  • The calculator will show the Implied Growth Rate. If the result is 8%, and the economy is only growing at 3%, your Exit Multiple assumption might be too aggressive.

Safe Assumptions for Terminal Growth

When manually selecting a growth rate for Terminal Value (rather than solving for it), follow these rules of thumb:

  • Ceiling: The rate should not exceed the long-term growth rate of the economy (Nominal GDP), typically 2% to 4%. A company cannot grow faster than the economy forever, or it would eventually become the entire economy.
  • Floor: Mature companies should at least track inflation (approx 2%).
  • Relation to WACC: The growth rate ($g$) must always be lower than the WACC ($r$). If $g > r$, the denominator in the Gordon Growth formula becomes negative, implying infinite value, which is impossible.

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