Conditions for Consistent Valuation of a Growing Perpetuity

11 Pages Posted: 30 Jan 2006

See all articles by Ignacio Velez-Pareja

Ignacio Velez-Pareja

Grupo Consultor CAV Capital Advisory & Valuation

Date Written: February 4, 2006

Abstract

Using the model proposed by Velez-Pareja (2006) and assuming straight line depreciation we examine the conditions to assure a constant growth rate in a growing perpetuity. Our findings are that in practical terms for a growing perpetuity there are two options: either depreciation life is one year or there is no depreciation at all.

The practical implication of this is that we have to find approximations when calculating terminal values in valuing cash flows. We examine some models and compare them with the theoretical model proposed in this note.

In the last part of this note we pose questions rather than solutions. We invite the reader to answer those questions and even to pose additional ones.

Keywords: Perpetuities, terminal value

JEL Classification: D61, G31, H43

Suggested Citation

Velez-Pareja, Ignacio, Conditions for Consistent Valuation of a Growing Perpetuity (February 4, 2006). Available at SSRN: https://ssrn.com/abstract=879515 or http://dx.doi.org/10.2139/ssrn.879515

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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