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Perpetuity growth rate

The rate at which cash flows are assumed to grow forever after the forecast period, capped in practice by long-run economic growth.

Anything above nominal GDP growth implies the company eventually becomes the entire economy, so the defensible range is roughly 1% to 3% in developed markets. Analysts who need a higher number are usually solving backwards from a desired answer.

The sensitivity is severe because the denominator is the discount rate minus the growth rate. Moving from 2% to 3% with an 8.1% discount rate raises terminal-value by about 20%.

Example: Northwind Tools at 2.5% perpetuity growth gives a $2.03B terminal value. At 1.5% it gives $1.68B and the whole valuation falls by 12%; at 3.5% it gives $2.55B.

Related: terminal-value, discounted-cash-flow, sensitivity-analysis, discount-rate, exit-multiple-method

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