What growth rate is used in the stable growth FCFF model when calculating total firm value?

In the context of the stable growth Free Cash Flow to the Firm (FCFF) model, a growth rate of 5% is often used as a reasonable assumption for the long-term growth of a company. This figure represents a sustainable growth rate that can be maintained over time without significantly straining the company’s resources or its market position.

The stable growth phase typically reflects the period where a company has matured, and its growth rate stabilizes after an initial high-growth phase. A 5% growth rate is traditionally considered a conservative estimate for many firms, particularly in developed markets, as it aligns with historical GDP growth rates and inflation expectations. This allows analysts to project future cash flows in a way that is realistic and attainable for most mature companies.

Using a rate that is too high could lead to overvaluation, while a rate that is too low may not adequately reflect the firm's potential. Thus, 5% is often seen as a balanced approach for forecasting growth in a stable environment, making it a commonly accepted choice in valuation models.