What is an appropriate growth rate for Terminal Value in mature economies?

What is an appropriate growth rate for Terminal Value in mature economies?

• A. 10% growth
• B. 0% growth
• C. Normally you use the country's long-term GDP growth rate, the rate of inflation, or something similarly conservative
• D. Double digit growth

Answer: (C)

Terminal value growth should reflect what the economy can sustain over the very long run, not an ambitious short-term burst. In mature economies, growth is limited, so the appropriate g is a conservative, macro-aligned rate—typically tied to the country’s long-run nominal growth, which is about the combination of real growth and inflation (i.e., long-run GDP growth or inflation). This keeps the terminal value in line with how the economy would actually expand over time and ensures the perpetuity formula remains sensible (g must be below the discount rate). Extremely high growth rates imply an unsustainable forever, while a zero growth assumption often ignores ongoing inflation and modest real growth. So, using a rate based on the country’s long-run GDP growth or inflation provides a prudent, realistic terminal value for mature economies.

Terminal value growth should reflect what the economy can sustain over the very long run, not an ambitious short-term burst. In mature economies, growth is limited, so the appropriate g is a conservative, macro-aligned rate—typically tied to the country’s long-run nominal growth, which is about the combination of real growth and inflation (i.e., long-run GDP growth or inflation). This keeps the terminal value in line with how the economy would actually expand over time and ensures the perpetuity formula remains sensible (g must be below the discount rate). Extremely high growth rates imply an unsustainable forever, while a zero growth assumption often ignores ongoing inflation and modest real growth. So, using a rate based on the country’s long-run GDP growth or inflation provides a prudent, realistic terminal value for mature economies.