Price the continuing business at the correct date
Consider a hypothetical business expected to generate €6 million in free cash flow in the first year after an explicit forecast. With a cost of capital of 8% and perpetual growth of 2%, the continuing value at the end of the forecast is €100 million: six divided by the six-percentage-point spread. Raising the discount rate to 9%, with cash flow and growth unchanged, reduces that figure to about €85.7 million. Neither figure is a present value; it must still be discounted back from the forecast horizon.
Make growth earn its place
If the business earns 10% on incremental invested capital, sustained growth of 2% requires reinvesting roughly 20% of after-tax operating profit in a steady-state model. With €7.5 million of that profit, the remaining €6 million matches the first calculation. Raising growth to 3% consumes approximately 30% of profit on the same return assumption. Holding profit fixed purely to isolate that effect leaves €5.25 million for investors, not €6 million.
Find the assumption worth researching
If the model relies on permanently exceptional returns, examine capacity constraints, replacement investment and competitive entry. If the business has a finite concession or a depleting asset, perpetuity may be the wrong framework altogether. A sensitivity table is useful only if its scenarios remain economically possible: discount rates must exceed perpetual growth, and nominal growth and discount rates must be expressed in the same currency and on the same inflation basis.
Practical check
Alongside terminal growth, disclose the assumed return on new capital, the reinvestment it requires and how much of today’s valuation comes from the continuing business.