Return to fundamentals: perpetuities, common wisdom and the use of the gordon constant growth model

Ignacio Velez-Pareja ()

No 4735, Proyecciones Financieras y Valoración from Master Consultores

Abstract: In this work we explain the proper use of perpetuities and the value of them. We consider two cases: calculating the value on period zero when the perpetuity starts with a given cash flow in period 1 and when it starts from a cash flow in period zero and it grows in period 1 at a given rate (as when we calculate a terminal or continuing value). We derive the proper expressions for the two cases. In particular we focus the analysis when there is no real growth and expected inflation is positive. We conclude that depending on which is the case we can use or not the Constant Growth Model (Gordon Model).

Keywords: WACC; CGM; constant growth model; gordon model; perpetuities; terminal value; tax savings (search for similar items in EconPapers)
JEL-codes: D61 G31 H43 (search for similar items in EconPapers)
Pages: 8
Date: 2008-07-01
References: Add references at CitEc
Citations:

Downloads: (external link)
http://papers.ssrn.com/abstract=1149525

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:000463:004735

Access Statistics for this paper

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