Module II· DCF — Terminal ValueIntermediate
Question
Why must g in Gordon Growth not reach or exceed WACC?
Answer
Mathematically
TV = FCF × (1+g) / (WACC − g). At g = WACC → denominator = 0, TV = infinite. At g > WACC → denominator negative, TV negative — absurd. Economically: g > WACC would mean the business earns a higher return than its cost of financing — forever. That would be a money-printing machine, would attract competition, and margins would collapse. Consequence: in steady state g cannot stay above WACC permanently. Practical rule of thumb: g should not exceed half of WACC.
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Example
WACC 8%, g max 3%. If your model needs g of 5% at a WACC of 7% → the DCF is driven by confirmation bias.