What is the definition of Gordon Growth Method

Gordon Growth Method is a methodology used in a DCF analysis, which can be used instead of the Terminal Multiple methods. The basis behind this method is that it assumes the company will grow and generate free cash flows forever at a consistent rate. This is because you assume that the business will be a going concern and will not go out of business or stop operating after the projection window in the DCF.

Gordon Growth Method Formula

Using the Gordon Growth method, the terminal value of the company using a DCF is calculated as:

  • Last Year Free Cash Flow x ((1 + Terminal Growth Rate) / (WACC - Terminal Growth Rate))

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