What does the perpetuity method assume in terminal value calculation?

What does the perpetuity method assume in terminal value calculation?

• A. Growth stops after year n
• B. No growth
• C. Constant growth forever
• D. Infinite debt

Answer: (C)

In the terminal value using the perpetuity method, cash flows are assumed to continue forever and grow at a constant rate. This is the Gordon Growth idea: after the explicit forecast period, the next cash flow grows at a steady rate g each year indefinitely, so the terminal value can be expressed as TV = CF1 / (r − g) (with r being the discount rate and r > g to keep it finite). This captures an infinite horizon with stable growth. Growth stopping after a finite year would imply a finite horizon, not a perpetuity. No growth is a special case of constant growth with g = 0, but the standard method specifically models ongoing growth into perpetuity. Infinite debt is unrelated to how the terminal value is formed from cash flows.

In the terminal value using the perpetuity method, cash flows are assumed to continue forever and grow at a constant rate. This is the Gordon Growth idea: after the explicit forecast period, the next cash flow grows at a steady rate g each year indefinitely, so the terminal value can be expressed as TV = CF1 / (r − g) (with r being the discount rate and r > g to keep it finite). This captures an infinite horizon with stable growth.

Growth stopping after a finite year would imply a finite horizon, not a perpetuity. No growth is a special case of constant growth with g = 0, but the standard method specifically models ongoing growth into perpetuity. Infinite debt is unrelated to how the terminal value is formed from cash flows.