Module II· DCF — Terminal ValueAdvanced
Question
What implicit reinvestment assumption is embedded in the Gordon Growth formula?
Answer
Gordon
TV = FCF × (1+g) / (WACC − g). Implied: to grow at g% per year, the company must reinvest. Reinvestment rate = g / ROIC. If ROIC = WACC: reinvestment is value-neutral. If ROIC > WACC: reinvestment creates value.
Deep diveShow more details
Consequence
terminal FCF must be after reinvestment. If your terminal FCF is 'full' (before growth capex) and you multiply by (1+g) → you are assuming growth 'for free'. Correct: terminal FCF = NOPAT × (1 − reinvestment rate) = NOPAT × (1 − g/ROIC).
Pitch tip
'Gordon uses FCF-after-reinvestment — at 2% growth and 12% ROIC, 17% of NOPAT is tied up in reinvestment.'