What long-term growth rate is typically assumed in the perpetuity growth method?

• A. Long-term GDP growth
• B. 0%
• C. Inflation rate
• D. WACC

Answer: (A)

In the perpetuity growth method, the terminal value assumes cash flows grow at a constant rate forever, so the rate chosen must reflect what the business can sustain in the long run. The best proxy for that sustainable growth is the economy’s long-run growth, captured by long-term GDP growth. This aligns the firm’s steady-state expansion with overall economic expansion instead of chasing any shorter-term or price-driven changes. Using 0% would underestimate growth for many firms; tying g to the inflation rate would mix price changes with real business growth and is not the standard anchor for this calculation unless cash flows are real; WACC is the discount rate, not the growth rate, so it doesn’t determine terminal growth. Therefore, the long-term GDP growth is the typical assumption.