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An alternative formula for the constant growth model

Author

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  • Forsyth, Juan A.

    (Universidad del Pacífico, Lima, Perú)

Abstract

The traditional one-stage constant growth formula has two main underlying assumptions: a company will be able to maintain its competitive advantage for completed investments in perpetuity, and each year in the future, it will be able to generate new investment opportunities with the same competitive advantage, which will also remain in perpetuity. The purpose of this paper is to develop a model that limits the duration of the competitive advantage. In this study, the author introduces an alternative formula considering the duration of the competitive advantage, imposing a restriction on the fact that extraordinary returns cannot be sustained forever, and also separates the part of the value explained by the current investments from the portion of value created by future investments.

Suggested Citation

  • Forsyth, Juan A., 2019. "An alternative formula for the constant growth model," Journal of Economics, Finance and Administrative Science, Universidad ESAN, vol. 24(48), pages 221-240.
    • Handle: RePEc:ris:joefas:0147
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    References listed on IDEAS

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    More about this item

    Keywords

    Investments; competitive advantage; returns; perpetuity;
    All these keywords.

    JEL classification:

    • F65 - International Economics - - Economic Impacts of Globalization - - - Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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