DCF modelling question
I have seen several DCF models where on a column right after the forecast period of financials, they have a normalized growth column. Here they assume X% of growth, say 2% for revenue, and this number is linked to these forecasted revenue numbers so that at the end of the forecast period, the growth of revenue will have converged to this number.
Can anyone recall what is the exact formula for this? I think you had to take the difference or something and then divide it by the number of years forecasted?
So if I am understanding your question,for example have a 5 year projection period, and growth in 1st year is say 10%, and growth in 5th year is 2%, and between years 1 and 5 you want the growth to step down by regular intervals until you get to 2%?
Well excel formula for that is:
$D$55-(($D$55-$H$55)/($H$53-$D$53))*(E53-$D$53)
$D$55 = Growth in first year $H$55 = Growth in last year $H$53 = Period count of last year (i.e. 5) $D$53 = Period count of first year (ie. 1) E53 = Period count of current year
Or, if you want a more curvilinear convergence, and using the nomenclature above, you would have;
$D$55*(($D$55/$H$55)^(1/$H$53-$D$53))^(E53-$D$53)
This would give you a geometric mean, where revenue growth would drop off more sharply in the first few years of the projection and then more gradually as time went on until it reached the terminal growth %.
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