Perpetuity Growth Method - Where to Apply the Growth Rate?
I've seen it done two ways.
1. The growth rate is applied to the revenue in terminal year. For example, Year 10 has 100mm in revenue and a 2% PGR means the terminal year has 102mm and it flows down to UFCF from there, and the PV of terminal value formula just becomes UFCF/(WACC-PGR).
2. Revenue is held constant and the growth rate is applied the terminal year UFCF. For example, if terminal year UFCF is 25, then we get 25.5 / WACC - PGR).
At the end of the day, the difference in value is pretty small, but what is the "correct" way to do this?
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