Hello! I have to value Coca Cola for a university assignment and I am not sure how to estimate the terminal growth rate. I could not find much information on that topic unfortunately. I read that for mature companies it should be somewhere between 2-3%. Based on what data can i come to this growth rate?
Thank you in advance!
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Correct me if I am wrong but usually it's somewhere between historical inflation and economic growth, so yes, it would be somewhere between 2-3%
The thing is 2 or 3% makes a big difference in terminal value, so I wanted to know which data I should use for terminal growth rate. so that it does not just seem like I took a random number.
Mature company won’t grow faster than GDP.
Run sensitivity on a range of terminal growth rates between ~1.5% ~3.0%
Did you try the exit multiple method as well?
Long term, the growth rate of the economy converges to the risk-free rate, which if it's a U.S company is around 1.70%. I would use the risk-free rate as your terminal value if you want to be conservative. If you are trying to actually get an accurate valuation, do not just plug 3% in. That will make a massive difference on your valuation and is not an accurate reflection of economic growth going forward.
There is criticism that using the risk-free rate can be dangerous because it is not always an accurate reflection of future economic growth. Think of the 1980s when we experiencing massive inflation and bonds were yielding double digits. Thats whys its important to be consistent with using the same risk-free rate in your cost of capital- the increased cost of capital will discount cash flows back at the appropriate rate.
You can run the the regressions on the average 10-year t-bond rate over virtually any time period against the average nominal GDP growth rate and will see a very high correlation.
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