Return to Fundamentals: Perpetuities, Common Wisdom and the Use of the Gordon Constant Growth Model (De Vuelta a lo Fundamental: Perpetuidades, Conocimiento Generalizado y el Uso del Modelo de Crecimiento Constante de Gordon)

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 starAI with a given cash flow in period 1 and when it starAI 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).

Note: Downloadable document is in Spanish.

Keywords: WACC, CGM, Constant Growth Model, Gordon Model, perpetuities, terminal value, tax savings

JEL Classification: D61, G31, H43