Perpetuity Growth Method - Where to Apply the Growth Rate?
I've seen it done two ways.
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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).
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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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