How to Calculate Perpetuity Growth Rate

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Implied Perpetuity Growth Rate Calculator

Determine the implied perpetuity growth rate (g) derived from an existing Terminal Value, Free Cash Flow, and Weighted Average Cost of Capital (WACC).

Implied Perpetuity Growth Rate
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How to Calculate Perpetuity Growth Rate

The Perpetuity Growth Rate is a critical assumption in the Discounted Cash Flow (DCF) valuation model. It represents the constant rate at which a company's free cash flows are expected to grow indefinitely after the explicit forecast period. When financial analysts have a known Terminal Value (perhaps derived from an Exit Multiple method) and want to sanity-check their assumptions, they calculate the implied perpetuity growth rate.

The Formula

While the standard Gordon Growth Model calculates Terminal Value based on a growth rate, we can rearrange the algebra to solve for the Growth Rate ($g$) if the Terminal Value ($TV$) is already known:

g = (TV × WACC – FCF) / (TV + FCF)

Where:

  • g: Perpetuity Growth Rate
  • TV: Terminal Value (the value of the business beyond the forecast period)
  • WACC: Weighted Average Cost of Capital (the required rate of return)
  • FCF: Free Cash Flow in the last year of the projection period

Step-by-Step Calculation Example

Let's say you are analyzing a company with the following metrics:

  • Terminal Value: $1,500,000 (calculated via an EBITDA multiple)
  • Final Year FCF: $80,000
  • WACC: 10% (0.10)

To find the implied growth rate:

  1. Multiply TV by WACC: $1,500,000 \times 0.10 = 150,000$
  2. Subtract FCF: $150,000 – 80,000 = 70,000$ (Numerator)
  3. Add TV and FCF: $1,500,000 + 80,000 = 1,580,000$ (Denominator)
  4. Divide Numerator by Denominator: $70,000 / 1,580,000 \approx 0.0443$
  5. Convert to Percentage: 4.43%

Interpreting the Result

Calculating the implied perpetuity growth rate is an excellent "sanity check" for valuations. Since no company can grow faster than the overall economy forever, the perpetuity growth rate should typically fall between the rate of inflation and the GDP growth rate (historically 2% to 4%).

If your calculator returns a rate significantly higher than GDP growth (e.g., >5%), your Terminal Value assumption might be too optimistic. Conversely, a negative growth rate implies the business will shrink indefinitely.

Why exclude "Loans" and "Interest"?

Unlike a loan calculator which deals with amortization, principal reduction, and APY, the perpetuity growth calculation deals with Corporate Finance and Valuation. The "WACC" is used instead of an interest rate because it accounts for both the cost of equity and the cost of debt, weighted by their respective proportions in the company's capital structure.

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