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Explanation: Implied Growth Rate, often derived from a discounted cash flow (DCF) model, is the rate of growth in earnings per share (EPS) that is implied by the model’s valuation. In a DCF analysis using EPS, future earnings per share are forecasted, and then discounted back to their present value using a discount rate. The implied growth rate is the rate at which these earnings per share are assumed to grow over time to justify the present value calculated by the model.
Additionally, the implied growth rate is influenced not only by the projected EPS growth but also by other factors such as the discount rate and terminal multiples used in the model. The company must grow earnings at this implied rate to support or justify your desired terminal multiple(s) at the end of the forecast period. This implies that the company’s earnings must increase at a consistent rate over time to meet the expectations embedded in the valuation model.
You can calculate the Implied Growth rate for various timeframes on Radar in the DCF section.