Growing Perpetuity
A stream of cash flows that grow at a constant rate g forever. PV = C₁ / (r − g), where C₁ is NEXT period's cash flow (not the current one), r is the required return, and g is the perpetual growth rate. Also called the Gordon Growth Model. Two discipline checks: (1) C₁ must be the next-period cash flow — using the trailing one understates value by exactly g; (2) r > g is mandatory — if g ≥ r the formula returns infinity, signaling the perpetual-growth assumption is impossible (no company can grow faster than the discount rate forever). The mechanism: each year's incremental dividend is offset by an extra period of discounting; the algebra collapses the infinite stream into a single closed-form number.
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Related terms
Adjusted Cost Basis · Annuity · Capital Gains Distribution · Capitalized Interest · Cost Basis · Dividend Discount Model (DDM)
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