The zero growth model with expected inflation: further insights. A consistent and inflation neutral formulation for the cost of equity

Ignacio Velez-Pareja ()

No 4708, Proyecciones Financieras y Valoración from Master Consultores

Abstract: The Constant Growth Model attributed to Gordon (the Gordon Model) is one of the most known and popular models in Corporate Finance. In this work we show that even withadjustments in the calculation of the proper Weighted Average Cost of Capital, WACC, in order to grant that the model with zero real growth and inflation is inflation neutral it hassome inconsistencies. We develop a formulation for Ke, the cost of levered equity that is consistent and is inflation neutral. We identify problems of consistency and non inflation neutrality when using the Weighted Average Cost of Capital, WACC.

Keywords: Constant growth model; perpetuities; terminal value; cost of equity for perpetuities; tax savings (search for similar items in EconPapers)
JEL-codes: D61 G31 H43 (search for similar items in EconPapers)
Pages: 12
Date: 2008-06-04
References: Add references at CitEc
Citations:

Downloads: (external link)
http://papers.ssrn.com/abstract=1139666

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:col:000463:004708

Access Statistics for this paper

More papers in Proyecciones Financieras y Valoración from Master Consultores
Bibliographic data for series maintained by Ignacio Velez ().