The LTG (Long term growth) rate is an industry-based parameter unique to the DCF with LTG. It represents the year-on-year growth of the free cash flow to equity after the projected period.
The source of our LTG rates is the online dataset curated with annual updates by Prof. Aswath Damodaran of New York University. The industry average Expected Growth in Earnings annual rates are used as the relevant proxy.
The rates are then winsorized by Equidam between 0% and 2.5%: negative rates are set equal to 0%, and all rates above 2.5% are set equal to 2.5%. This threshold is set to avoid companies growing more than a conservative estimate of world GDP growth, which would mean that the company will eventually outgrow the global economy – a rather unrealistic scenario.
LTG rates in young, fast growing companies
These rates might appear relatively low for companies coming from steep growth periods. However, it must be remembered the rates will last forever, so even a small amount means future performance of considerable size.