An alternative formula for the constant growth model

Juan A. Forsyth
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Juan A. Forsyth: Universidad del Pacífico, Lima, Perú

Journal of Economics, Finance and Administrative Science, 2019, vol. 24, issue 48, 221-240

Abstract: The traditional one-stage constant growth formula has two main underlying assumptions: a company will be able to maintain its competitive advantage for completed investments in perpetuity, and each year in the future, it will be able to generate new investment opportunities with the same competitive advantage, which will also remain in perpetuity. The purpose of this paper is to develop a model that limits the duration of the competitive advantage. In this study, the author introduces an alternative formula considering the duration of the competitive advantage, imposing a restriction on the fact that extraordinary returns cannot be sustained forever, and also separates the part of the value explained by the current investments from the portion of value created by future investments.

Keywords: Investments; competitive advantage; returns; perpetuity (search for similar items in EconPapers)
JEL-codes: F65 G11 G20 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:ris:joefas:0147

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