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The Flawed Perpetual Growth Assumption and Its Impact on Terminal Value

Authors:
  • Sutter Securities Financial Services, San Francisco

Abstract

In the customary determination of terminal value in a discounted cash flow analysis, it is assumed that a mature company will grow at a constant rate in perpetuity. This article explains why the perpetual growth concept is flawed and needs to be reexamined. It also discusses proposals to recognize the risks of corporate decline and corporate mortality and to make appropriate adjustments.
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