Conditions for consistent valuation of a growing perpetuity

Ignacio Velez-Pareja ()

No 4324, Proyecciones Financieras y Valoración from Master Consultores

Abstract: Using the model proposed by Velez-Pareja (2006) and assuming straight line depreciation we examine the conditions to assure a constant growth rate in a growingperpetuity. Our findings are that in practical terms for a growing perpetuity there are two options: either depreciation life is one year or there is no depreciation at all. The practical implication of this is that we have to find approximations when calculating terminal values in valuing cash flows. We examine some models and comparethem with the theoretical model proposed in this note. The results based on an example are that the model with a nominal plowback ratio is the one that approximates more to the theoretical" value when depreciation life is one year. The nearest value for typical depreciation lives is more than 95% higher than the theoretical value. In the last part of this note we pose questions rather than solutions. We invite the reader to answer those questions and even to pose additional ones."

Keywords: Perpetuities; terminal value (search for similar items in EconPapers)
JEL-codes: D61 G31 H43 (search for similar items in EconPapers)
Pages: 11
Date: 2007-12-04
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Persistent link: https://EconPapers.repec.org/RePEc:col:000463:004324

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