Question

In order to obtain a credible result for the horizon value, what relationship must be assumed between the

      growth rate and the weighted average cost of capital?

Answer 1

In order to obtain a proper Horizon value (or Terminal Value) / Enterprise value with perpetuity Growth, the Growth % cannot be higher than that of the Weighted Average Cost of Capital.

In a series of cash flows during the period, there can be negative growth, however, if we are using the Growth factor as Perpertuity, the Growth % cannot tbe higher than WACC.

Also, the Growth should be consistent at Terminal year for assessing the Terminal Value in Perpetuity model; If the Growth is inconsistent, then a Multiple-Stage Terminal Value need to be calculated.