1. What is Perpetual Growth Rate?

The perpetual growth rate is the constant rate at which a company's free cash flows are expected to grow forever. It's a key input in terminal value calculations for discounted cash flow (DCF) models.

2. How is Perpetual Growth Rate Calculated?

The perpetual growth rate is calculated as:

Where:

• Long-term Inflation — Expected long-term inflation rate
• GDP Growth — Expected long-term GDP growth rate

Explanation: The perpetual growth rate should not exceed the long-term growth rate of the economy, which is why it's typically capped at inflation plus GDP growth.

3. Importance of Perpetual Growth Rate

Details: The perpetual growth rate significantly impacts terminal value in DCF models. An overly optimistic rate can dramatically overvalue a company, while too conservative a rate may undervalue it.

4. Using the Calculator

Tips: Enter the expected long-term inflation rate and GDP growth rate as percentages. The calculator will sum these to give the perpetual growth rate.

5. Frequently Asked Questions (FAQ)

Q1: What's a reasonable perpetual growth rate?
A: Typically 2-3% (1-2% inflation + 1-2% real GDP growth). Rates above 3-4% are often unrealistic for mature companies.

Q2: Why can't perpetual growth exceed GDP growth?
A: No company can grow faster than the economy forever - it would eventually become the entire economy.

Q3: Does this apply to all companies?
A: More applicable to mature companies. High-growth companies may have higher short-term rates that converge to this long-term rate.

Q4: How sensitive is valuation to this rate?
A: Very sensitive - small changes can significantly impact terminal value in DCF models.

Q5: Should I use nominal or real rates?
A: Be consistent - if cash flows are nominal, use nominal rates; if real, use real rates.