Fade Rate

In multi-stage DCF (and reverse DCF), the assumed rate at which a company's growth premium decays from its explicit-period high-growth rate to its long-run terminal growth rate (typically pegged to nominal GDP). A single-stage DCF implicitly assumes NO fade — the explicit growth rate continues to infinity — which is economically implausible because no company can compound above the broader economy forever. Two-stage and three-stage DCFs build the fade explicitly: e.g., 8% growth for 10 years, then linear fade to 3% terminal growth over years 11-20, then 3% forever. The pace of fade is often the highest-leverage assumption in the model after terminal growth itself; aggressive (slow) fade assumptions are a common way analysts smuggle optimism into a model that looks otherwise conservative.

Lessons that use this term

• Reverse DCF: What Does the Market Price Imply?
• Fade-Period Assumptions in DCF

Related terms

Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta

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