Afteryear5,thegrowthrateisexpectedtodropto5%and
thereturnoncapitalisexpectedtostayat20%.Theterminal
value can be estimated as follows:
The value of the firm today would then be:
Ifwedidchangethereturnoncapitalinstablegrowthto10%
while keeping thegrowth rate at5%, the effect on value
would be dramatic:
Nowconsidertheeffect ofloweringthegrowthrateto 4%
while keeping the return on capital at 10% in stable growth: