How do I calculate terminal value on a DCF if growth rate is higher than discount rate?
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I am working on a DCF analyisis, and the growth rate is around 30%. I want to calculate the terminal value, but the textbooks say that this is based on terminal year plus 1 free cash flow, divided by the discount rate minus the growth rate. However, in this case the discount rate is 15% and the growth rate is 30% this leads to a negative terminal value, which is clearly wrong. What is going on here? thanks.
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Answer:
You have calculated your either your R or G incorrectly. G is Retentioin rate multiplied by Return on Equity. R is RFR plus Beta times Market Risk Less Risk-Free rate. Otherwise, the problem you are doing does not fit the model. Best of luck!
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