Gordon Growth (Terminal Growth): Definition and Calculation
Gordon Growth is a method to compute terminal value in DCF by assuming perpetual growth at a constant rate. Also called the Gordon Growth Model.
Formula
Where g is the perpetual growth rate and r is the discount rate (WACC). Ensure g < r and choose conservative values (often slightly below long-term GDP/inflation).
Notes
- Terminal value often represents a large portion of DCF value; assumptions for g and r are critical.
- Choose conservative terminal growth rates to avoid overstating long-term prospects.
- Compare Gordon Growth to exit-multiple approaches (e.g., EV/EBITDA) as a sensitivity check.
Why it matters
Gordon Growth model is fundamental to DCF valuations as terminal value often represents 60-80% of total value. Assumptions about perpetual growth rate and discount rate are critical to valuation accuracy.