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The terminal growth rate is only one of the many assumptions you make in a DCF valuation. However, the terminal growth rate has a huge impact on the valuation. So it is very important that you get this right.
On this page, we address the question: “What are the key principles you must stick with when deciding on the terminal growth rate you use in your DCF valuation?”
There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage the company and expected growth drivers as well as the information available.
Each method has its advantages and disadvantages! In this page, we address the question: “What are the draws backs of the perpetual growth approach to terminal value? How do you address this?”
There are different methods to estimate terminal value in a DCF valuation. The perpetual growth rate method is the most common approach. Other methods include a multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage the company and expected growth drivers as well as the information available. The perpetual growth rate method is the most common approach. However, the perpetual growth rate is usually assumed to be a positive value. Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not? We address this question: “Can the terminal growth rate in a perpetual growth rate method be negative? Why or Why not?” on this page:
There are different methods to estimate terminal value in a DCF valuation. You can estimate terminal value in a DCF valuation using any of the common methods: perpetual growth rate, a multiples of earnings, cash flows or revenues or less common methods such as orderly liquidation value; or a fire sale value. The method you chose depends on the stage the company and expected growth drivers as well as the information available. Which method should you use to estimate terminal value in a DCF valuation?