![]() The business will continue to grow but no longer at the substantial growth rate it had previously experienced. The rapid-growth stage is often followed by a relatively decelerated growth stage, as the company will likely struggle to maintain its high growth rate due to the rising competition within the industry. ![]() As such, it will experience rapid growth in revenue and, thus, free cash flow. The business has established its position in the industry and is seeking to increase its market share. We assume a high growth rate (usually over 10%) for business in its early stage of expansion. Typically, we construct a three-staged growth model to project a firm’s free cash flows and determine said firm’s value at each level of maturity: 1. When making projections for a firm’s free cash flow, it is common practice to assume there will be different growth rates depending on which stage of the business life cycle the firm currently operates in. This growth rate is used beyond the forecast period in a discounted cash flow model, from the end of the forecasting period in perpetuity, we will assume that the firm’s free cash flow will continue to grow at the terminal growth rate, rather than projecting the free cash flow for every period in the future. The terminal growth rate is the constant rate at which a firm’s expected free cash flows are assumed to grow indefinitely. Updated OctoWhat is the Terminal Growth Rate?
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