Under what condition might using a negative terminal free cash flow growth rate be appropriate?

Using a negative terminal free cash flow growth rate can be appropriate in scenarios where a company is experiencing a downturn in its cash flows, such as due to expiring patents. This situation implies that the company is likely to see its revenue and cash flow decrease over time as its competitive advantage wanes. The loss of exclusive market rights to certain products means that, without new innovations or replacements, the company will face increased competition, leading to a potential decline in market share and profitability.

In this context, applying a negative growth rate in the terminal value calculation reflects the reality that the company may not maintain its previous levels of cash flow and possibly experience a gradual decline. This approach aligns with prudent financial forecasting, as it anticipates future challenges the company will face due to its diminishing product offerings. It highlights a more realistic financial picture rather than assuming stability or growth when such conditions are not present.

In contrast, scenarios like a declining overall market or stable cash flow environments are generally not suited for negative growth projections, as these contexts usually imply that companies can maintain or even improve their cash flows. High inflation situations typically do not necessitate a negative growth rate either; companies can often increase prices in inflationary environments, leading to positive cash flow growth.