Finance · level 3
Implied growth from a multiple
Any multiple is a statement about growth. Flip it into a spread over the discount rate and you can say out loud what the market is assuming.
Worked example: A business trades at 16× free cash flow with a WACC of 12%. Implied perpetual growth?
multiple16×
1 / multiple6.25%
implied g5.75%
Step by step
- 1
A multiple is 1 / (r − g)
16 = 1 / (r − g)
- 2
So r − g = 1 / multiple
1 / 16 = 6.25%
- 3
Solve for g
12% − 6.25% = 5.75%
- 4
Judge it
Above long-run GDP — the price embeds heroic growth.
A business trades at 16× free cash flow with a WACC of 12%. Implied perpetual growth? = 5.75
The theory behind it
Intuition
Reversing a multiple tells you what the market already believes. If the implied growth is heroic, the stock is priced for perfection.
Common pitfalls
- ×Solving for growth while holding the discount rate at a value inconsistent with the multiple.
- ×Mixing trailing and forward metrics.
In the interview
M&A and market-view rounds: 'what has to be true for this price?'