If a company expects its cash flows to decline, which terminal FCF growth rate might be appropriate?

When a company anticipates a decline in its cash flows, utilizing a negative growth rate for the terminal free cash flow (FCF) can be appropriate. This approach directly reflects the company's expected performance, recognizing that if cash flows are projected to decrease, it makes sense to adjust the terminal growth rate to mirror that downturn.

By integrating a negative growth rate, analysts acknowledge the reality of the company's situation, rather than assuming that cash flows will continue to grow indefinitely or stabilize. This perspective helps set more realistic expectations for the valuation, ensuring that the terminal value does not unrealistically inflate the overall value of the company. Consequently, the approach of employing a negative growth rate aligns with a cautious and accurate portrayal of the company’s future cash flow trajectory.