Module II· DCF — Terminal ValueAdvanced
Question
How do you model a 'fade period' in the growth rate?
Answer
Mechanics
the fade period lets the growth rate converge from the forecast-start value to the terminal value. Linear fade formula:
```
g(t) = g_start − (g_start − g_terminal) × (t − t_start) / (t_end − t_start)
```
Deep diveShow more details
Example (linear fade)
Inputs:
- g_start: 10%
- g_terminal: 2%
- Fade period: 5 years
Calculation:
```
Year 1: 10%
Year 2: 8%
Year 3: 6%
Year 4: 4%
Year 5: 2%
```
Alternative (exponential)
```
g(t) = g_terminal + (g_start − g_terminal) × e^(−k × t)
```
Foundation
competitive theory — excess returns converge to the cost of capital.
Practical values
- 5–10 years for industrial targets.
- 10–15 years for pharma/patent businesses.
- 3–5 years for mature middle-market companies.
Pitch tip
in tech equity research, fade modeling is often communicated openly — IB uses it less explicitly, but showing it signals depth in an interview.