Often, all of us, students and professionals alike, are tempted to fudge assumptions. We may call it mild terms such as “improving”, “modifying”, etc. to feel better about it. The first assumption we usually tamper with is revenue growth rates! But what can go wrong here? Does increasing the revenue growth rate (not terminal growth rate) increase firm value? We address this question on this page “Does increasing the revenue growth rate (not terminal growth rate) increase firm value? What could be wrong if you do that?”

Yes, increasing the revenue growth rate during the forecast period increases your firm value.

However, you will be wrong if you increase your revenue growth rate with all other assumptions kept constant and without an external reason for this increased revenue growth. You are wrong because growth is not free! You must increase your reinvestment rate to have higher growth rates. With a higher reinvestment rate, you have lower free cash flow offsetting the gains in revenue growth rate. Therefore, if you increase revenue growth rate, you will have to have a good reason for the increase including higher reinvestment rates and/or reasons better return on invested capital.