Steady-state Growth

Abstract

The starting point for estimating firm-specific steady-state growth, which is a critical assumption in implementing fundamental valuation, is the expected long-term growth rate of the economy in which the company operates. This study provides evidence that supports using the risk-free long-term interest rate as the basis for forecasting long-term economy-wide growth. Using the risk-free interest rate and various economists’ forecasts, the study then develops a composite estimate of long-term GDP growth. It concludes by discussing potential adjustments to this estimate in deriving firm-specific steady-state growth rates.