The Terminal Value and Inflation Controversy

9 Pages Posted: 13 Oct 2012

See all articles by Daniel Kiechle

Daniel Kiechle

University of Hohenheim

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences

Multiple version iconThere are 2 versions of this paper

Date Written: Summer 2012


This journal recently published what was effectively a debate between Gunther Friedl and Bernhard Schwetzler (hereafter “F&S”), on the one hand, and Michael Bradley and Gregg Jarrell (“B&J”). B&J initiated the first round of the debate by criticizing the constant growth valuation model, commonly known as the “Constant Growth Model” or “Gordon Growth Model.” The Gordon Growth Model was introduced by Myron Gordon and Eli Shapiro (“G&S”) in a 1956 paper and has long been widely used by corporate and investment practitioners. F&S responded to B&J with a defense of the original G&S formulation. In revisiting this debate, the authors find that the models B&J and F&S advocate are at bottom two different versions of the same G&S constant growth model, but with quite different assumptions about the effect of inflation on the amount of capital reinvestment required to sustain businesses over time. The authors resolve the dispute by showing that both models, when using a consistent set of assumptions about inflation and capital reinvestment, produce identical growth rates and estimates of value. At the same time, however, the authors recognize that the two models (the G&S/F&S model, on the one hand, and the B&J model on the other) are likely to be appropriate for very different kinds of companies, and each for only small subsets of companies.

Suggested Citation

Kiechle, Daniel and Lampenius, Niklas, The Terminal Value and Inflation Controversy (Summer 2012). Journal of Applied Corporate Finance, Vol. 24, Issue 3, pp. 101-107, 2012, Available at SSRN: or

Daniel Kiechle (Contact Author)

University of Hohenheim ( email )

Fruwirthstr. 48
Stuttgart, 70599

Niklas Lampenius

University of Hohenheim - Faculty of Business, Economics and Social Sciences ( email )

Stuttgart, 70593

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