Return to Fundamentals: Perpetuities, Common Wisdom and the Use of the Gordon Constant Growth Model

10 Pages Posted: 23 Jun 2008 Last revised: 22 Sep 2008

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: June 28, 2008

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

JEL Classification: D61, G31, H43

Suggested Citation

Velez-Pareja, Ignacio, Return to Fundamentals: Perpetuities, Common Wisdom and the Use of the Gordon Constant Growth Model (June 28, 2008). Available at SSRN: https://ssrn.com/abstract=1149525 or http://dx.doi.org/10.2139/ssrn.1149525

Ignacio Velez-Pareja (Contact Author)

Grupo Consultor CAV Capital Advisory & Valuation ( email )

Ave Miramar # 18-93 Apt 6A
Cartagena
Colombia
+573112333074 (Phone)

HOME PAGE: http://cashflow88.com/decisiones/decisiones.html

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