DCF Perpetuity Growth Rate
What are you guys currently using for the perpetuity growth rate in the DCF? I know it typically mimics GDP growth, but that is looking pretty negative right now. Are people generally using around 1.0% or is it even lower?
Perpetuity Growth Rate DCF
From Macabus
The perpetuity growth rate is typically between the historical inflation rate of 2-3% and the historical GDP growth rate of 4-5%. If you assume a perpetuity growth rate in excess of 5%, you are basically saying that you expect the company's growth to outpace the economy's growth forever.
You can see below for other opinions offered by experienced WSO users.
Its not necessarily current years GDP growth... its basically just a theory that perpetual growth and GDP should converge the future. For example, if you were valuing a Chinese company selling 100% of their goods into Chinese markets would you use a 7-8% perpetual growth rate? Probably not.I think its more of a case by case decision. You might as well just use a ball park estimate(say 3%), a peak to trough average, 10-yr average, etc...
In the end, if you use multiples, you imply a perpetual growth rate. Therefore, it's really the same thing. Any DCF I have worked on has both anyway. Generally, you should always check the implied growth rate when using multiples to make sure it's reasonable.
since it's in perpetuity you should aim to come as close as you can to what that number is likely to be in coming years...yeah things are shitty now, but it is very unlikely that gdp growth is gonna stick around 1% forever
Its not necessarily current years GDP growth... its basically just a theory that perpetual growth and GDP should converge the future. For example, if you were valuing a Chinese company selling 100% of their goods into Chinese markets would you use a 7-8% perpetual growth rate? Probably not.
I think its more of a case by case decision. You might as well just use a ball park estimate(say 3%), a peak to trough average, 10-yr average, etc...
The DCF model based upon a perpetuity growth model is fundamentally flawed because you are attributing in some cases 80% of the company's value to a VERY rough estimate for the company's growth prospects. Although if you can accurately predict when the company's growth starts to stabilize, it becomes a bit more accurate. Nevertheless, I think sensitizing terminal value multiples is the most accurate method.
Easy, the perpetuity growth rate is the one which values the company equal to the value the MD says it is.
mergerarb15, I'll have to disagree with you... Because no method is better than the other. I can argue that, although widely used in IB and valuations, the exit multiple method for estimating TV is also not 100% accurate, since this multiple comes from looking at how comparable companies trade in the market and when doing so you effectively converts the discounted cashflow valuation into a relative valuation...
In the end, if you use multiples, you imply a perpetual growth rate. Therefore, it's really the same thing. Any DCF I have worked on has both anyway. Generally, you should always check the implied growth rate when using multiples to make sure it's reasonable.
To be honest, it's easy to say that a DCF isn't great because the majority of the value is in the terminal value. However, there are no good alternatives. Obviously multiples are just relative and don't make any judgement about intrinsic value. An LBO valuation is really a DCF using FCFE and the exit multiple again implies a perpetual growth rate. Only interesting method I have seen - but haven't applied in any real valuations yet - is residual income valuation (EVA is one type of this). But with those methods, the majority of the value is usually in the book value you start with before adding residual earnings in the future. Nothing is perfect.
That's why the best thing one can do is to use 3 or 4 of these methodologies and triangulate all of them to derive a valuation range for the firm.
Can I get perpetual growth rate as follow:
2.5% real GDP growth rate + 2.5% expected inflation rate = around 5%. If only use 3% GDP growth rate, will it be too low?
Thanks!
The best DCF valuation is the valuation that 1) First will get you mandated on a transaction 2) Second that you can convince the buyer and seller to agree on and get you paid a fee 3) Third and finally can make sure that you don't get sued later for fraud or gross negligience
CHEERS
3% GDP growth is high in some and low in others lol ... i.e Japan
similarly inflation, etc - it all depends - this is the most open ended question.
If you were modeling out a company in Zimbabwe .... you might wanan add 5 0's to that inflation rate
So 1.500000%?... sounds a bit extreme.
dude, as a matter of fact I come from Zimbabwe and trust me 5 0's wont do shit~ actual inflation rate between 2006-2007 (meaning not d official ones you see on TV) was 1,000, 000, 000 % 1 trillion percent NO KIDDING!
I left Zimbabwe after 2007...just cant handle man..just cant...
LMAO 1 trillion percent
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