Solve for 'g' in the Gordon Growth Model based on Terminal Value.
The estimated value of the business at the end of the projection period.
FCF in the last year of the forecast period (Year n).
The Weighted Average Cost of Capital expected in perpetuity.
Implied Perpetual Growth Rate
0.00%
function calculatePGR() {
// 1. Get Elements
var tvInput = document.getElementById('terminalValue');
var fcfInput = document.getElementById('finalFCF');
var waccInput = document.getElementById('wacc');
var resultSection = document.getElementById('resultSection');
var resultValue = document.getElementById('resultValue');
var resultContext = document.getElementById('resultContext');
// 2. Parse Values
var tv = parseFloat(tvInput.value);
var fcf = parseFloat(fcfInput.value);
var waccPercent = parseFloat(waccInput.value);
// 3. Validation
if (isNaN(tv) || isNaN(fcf) || isNaN(waccPercent)) {
alert("Please enter valid numeric values for all fields.");
return;
}
if (tv <= 0 || fcf 5) {
feedback = "Caution: This growth rate (" + gPercent.toFixed(2) + "%) exceeds typical long-term GDP growth rates (usually 2-3%). It implies the company will eventually become larger than the entire economy. Re-evaluate your Terminal Value assumption.";
} else if (gPercent < 0) {
feedback = "Note: The result is negative. This implies the business is expected to shrink in perpetuity based on the current Terminal Value and WACC inputs.";
} else if (gPercent >= 2 && gPercent <= 4) {
feedback = "Realistic Range: This growth rate falls within the standard long-term economic growth expectations (inflation + real GDP growth).";
} else {
feedback = "The calculated perpetual growth rate is " + gPercent.toFixed(2) + "%. Ensure this aligns with the mature phase expectations of the specific industry.";
}
resultContext.innerHTML = feedback;
}
How to Calculate Perpetual Growth Rate of FCF
The Perpetual Growth Rate is a critical assumption in the Discounted Cash Flow (DCF) valuation method. It represents the constant rate at which a company's Free Cash Flow (FCF) is expected to grow indefinitely after the explicit forecast period. Getting this number right is essential, as the Terminal Value often accounts for 60-80% of the total valuation in a DCF model.
The Core Logic
Most analysts use the rate to find the Terminal Value. However, it is often necessary to work backward—calculating the Implied Perpetual Growth Rate based on a known Terminal Value (derived from an exit multiple, for example). This acts as a sanity check to ensure your valuation is realistic relative to the broader economy.
The Formula
The calculation stems from the Gordon Growth Model. To find the implied growth rate ($g$) when you know the Terminal Value ($TV$), the Final Year FCF ($FCF_n$), and the WACC ($r$), use the following derived formula:
g = (TV × WACC – FCFn) / (TV + FCFn)
Where:
TV: Terminal Value (Value of the business at the end of the projection).
WACC: Weighted Average Cost of Capital (Discount Rate).
FCFn: Free Cash Flow in the final year of the explicit forecast.
Why "Reasonableness" Matters
When calculating the perpetual growth rate of FCF, the result should mathematically align with long-term macroeconomic indicators. Since no company can grow faster than the economy forever, a "reasonable" perpetual growth rate typically falls between the rate of inflation and the nominal GDP growth rate.
Safe Range: 2.0% to 4.0% (for mature markets like the US or EU).
Red Flag: > 5.0% (Implies the company will eventually overtake the economy).
Negative Rate: Implies the company is in terminal decline.
Example Calculation
Imagine a company with a Final Year FCF of $1,000,000. You have estimated a Terminal Value of $15,000,000 based on an EBITDA multiple, and the company's WACC is 10%.