I know how to find the terminal value, this question is about estimating the terminal growth rate...
I have used the search bar and can't find a definitive answer.
I have been told that it should be GDP growth rate +/- your estimate. Anyone else ever hears this? I know that it should be somewhere between 1-3%.
By the way, I am using this for a DCF model of Procter and Gamble...Thanks, guys!
How to Determine Terminal Growth Rate
The terminal growth rate is a percentage that represents the expected growth rate of a firm's free cash flow. The percentage is used beyond the end of a forecast period until perpetuity. The percentage is usually fixed for that period. There are three different percentage ranges used. The most common being the mature range.
- Initial growth rate
- The company is seizing market share and is experiencing high revenue growth. Growth rate 10% or greater
- Slowing growth rate
- Company is somewhat established and gains competitors. Some resources diverted to keeping current market share. Growth rate between 5% and 8%
- Mature growth rate
- Company is established and allocates a substantial amount of it's resources to protecting its market share, Positive growth rates at this stage mirror the historical inflation rate, between 2% and 3%. Historical GDP growth can be used alternatively which is between 4% and 5%.
from certified risk management professional @SSits
terminal growth rate is usually the long-term growth rate. If your industry is in the mature state (not growth, not decline) and your company's market share will remain stable, then the assumption is that long-term growth rate = GDP growth rate.
As a sense check, you can look at the multiples of similar companies in mature markets and back out their implied long-term growth rate using the Gordon growth model concept, although it gets a little conceptually muddy.
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