Formula
TV = NOPATₙ₊₁ × (1 − g/ROIC) / (WACC − g)
Compare
| If ROIC... | Growth Creates... | Implication |
|---|---|---|
| > WACC | Value (positive NPV projects) | Growth is good — higher g increases TV |
| = WACC | No value (NPV zero) | Growth doesn’t matter — TV same regardless of g |
| < WACC | Destroys value (negative NPV) | Growth is BAD — higher g decreases TV |
Key point
This is the most underappreciated insight in valuation: growth only creates value if ROIC exceeds WACC. A company growing 10% with 8% ROIC and 10% WACC is destroying value with every dollar it reinvests.
Try it
Check a company’s ROIC in **Fundamentals** and compare it to your estimated WACC. If ROIC < WACC, the company would be worth more if it stopped growing and returned all capital to shareholders.
Check-in
A company’s ROIC is 8% and WACC is 10%. Management plans to grow 15% annually. Is this value-creating?
Key insight
Check-in
Continuing (Terminal) Value: Company has explicit 10-year forecast. In year 11+, free cash flow is $50M, WACC 8%, terminal growth 2.5%. What's the TV?
Check your understanding
Sit with the ideas.
Company Z has Year 10 NOPAT of $200M, WACC of 9%, and plans to grow at 3% indefinitely. Under Scenario A, RONIC = 15%. Under Scenario B, RONIC = 9% (equals WACC). What is the continuing value in each scenario?
Why: