A financial analyst expects a company's cash flows to continue perpetually. What must they estimate for DCF analysis?

In a Discounted Cash Flow (DCF) analysis, particularly when cash flows are expected to continue perpetually, the long-term growth rate is essential. This rate is used to project the future cash flows of the company beyond the forecast period, which is critical for estimating the terminal value in the DCF model. The terminal value represents the present value of all future cash flows beyond the explicit forecast period, assuming a constant growth rate.

Estimating a long-term growth rate allows the analyst to determine how much the company's cash flows are expected to grow indefinitely. This is particularly important in industries where companies can sustainably grow through competitive advantages, innovation, or market demand. Hence, without a reasonable estimate of the long-term growth rate, the DCF analysis could yield unreliable results, misrepresenting the company's value.

In contrast, considering current liabilities, real estate value, or market volatility does not directly influence the terminal value calculation in this context. Current liabilities are related to short-term obligations and do not pertain to evaluating long-term cash flows. Real estate value is a specific asset valuation that may support cash flows but is not essential for the long-term growth rate assumption in the analysis. Market volatility, while important for assessing risks and stock valuation, does not provide an