Inflation and the Constant Growth Model – Reconciling the Literature
Abacus, Vol. 48, Issue 4, pp. 518-538, 2012
25 Pages Posted: 4 Aug 2010 Last revised: 14 Oct 2013
Date Written: August 3, 2010
We formulate a generalised constant growth valuation model incorporating inflation and capital maintenance. We find that in general there are two sources of growth: growth due to capital maintenance and growth due to net new investments. The generalised version of the constant growth model allows to reconcile the existing literature, particularly the works of Gordon and Shapiro (1956), Lally (1988), and Bradley and Jarrell (2008), which all employ particular definitions of capital maintenance. Evaluating the practical relevance of either model we find that each model is best suited for a very particular company set-up, which does not necessarily correspond to the commonly observed business models. The generalised version of the constant growth valuation model however presents a flexible approach that is capable to capture various conceptions of capital maintenance.
Keywords: valuation, constant growth model, inflation, capital maintenance, terminal value
JEL Classification: G12, G30, M40
Suggested Citation: Suggested Citation