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What is the Right Long-Term Growth Rate?

by Brian Bornino

When selecting a long-term growth rate to use in the terminal year of a discounted cash flow method (or for use in a capitalized cash flow method), it is common to hear valuation professionals state that “a company’s growth cannot outpace the growth of the economy and the industry over the long-term” and then proceed to select a growth rate of ~3%.  Obviously, the appropriate long-term growth rate to use in a particular valuation is a matter of facts and circumstances, but if long-term inflation estimates are ~2% and long-term real GDP growth for the U.S. is forecasted around ~3% (i.e., the growth of the economy as a whole, excluding inflation), wouldn’t a 5% long-term growth rate make more sense?

Comments?

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2 thoughts on “What is the Right Long-Term Growth Rate?

  1. Ann

    It is an interesting perspective. Perhaps not one that's appropriate for every business of course, but I could see in a company with a long history of growth, with a projected stable future with similar growth, that it could make sense. Have you ever come across a study of companies' long term growth rates?

    Reply
    1. Brian Bornino

      Thank you for your comments. I have never seen a study on long-term growth rates, but there are plenty of sources that project future real GDP growth and inflation. Seems that the sum of those two numbers would represent the expected nominal growth of the economy as a whole. I certainly agree that this should vary based on the company and its industry.

      Reply

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