IDEAS home Printed from https://ideas.repec.org/a/ris/joefas/0147.html
   My bibliography  Save this article

An alternative formula for the constant growth model

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/JEFAS-07-2018-0067/full/pdf?title=an-alternative-formula-for-the-constant-growth-model
    File Function: Full text
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Myers, Stewart C, 1974. "Interactions of Corporate Financing and Investment Decisions-Implications for Capital Budgeting," Journal of Finance, American Finance Association, vol. 29(1), pages 1-25, March.
    2. Danny Miller & Peter H. Friesen, 1984. "A Longitudinal Study of the Corporate Life Cycle," Management Science, INFORMS, vol. 30(10), pages 1161-1183, October.
    3. Robert Jacobsen, 1988. "The persistence of abnormal returns," Strategic Management Journal, Wiley Blackwell, vol. 9(5), pages 415-430, September.
    4. Aharony, Joseph & Swary, Itzhak, 1980. "Qtrly Dividend and Earnings Announcements and Stockholders' Returns: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 35(1), pages 1-12, March.
    5. Robert R. Wiggins & Timothy W. Ruefli, 2002. "Sustained Competitive Advantage: Temporal Dynamics and the Incidence and Persistence of Superior Economic Performance," Organization Science, INFORMS, vol. 13(1), pages 81-105, February.
    6. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    7. James Claus & Jacob Thomas, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
    8. William R. Gebhardt & Charles M. C. Lee & Bhaskaran Swaminathan, 2001. "Toward an Implied Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 39(1), pages 135-176, June.
    9. Robert A. Taggart & Jr., 1991. "Consistent valuation and Cost of Capital Expressions With Corporate and Personal Taxes," Financial Management, Financial Management Association, vol. 20(3), Fall.
    10. Isik Inselbag & Howard Kaufold, 1997. "Two Dcf Approaches For Valuing Companies Under Alternative Financing Strategies (And How To Choose Between Them)," Journal of Applied Corporate Finance, Morgan Stanley, vol. 10(1), pages 114-122, March.
    11. Morris James R, 2009. "Life and Death of Businesses: A Review of Research on Firm Mortality," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 4(1), pages 1-41, October.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fernandez, Pablo, 2005. "Financial literature about discounted cash flow valuation," IESE Research Papers D/606, IESE Business School.
    2. Ralf Diedrich & Stefan Dierkes & Hans-Christian Gröger, 2022. "A note on the cost of capital with fixed payout ratios," Review of Quantitative Finance and Accounting, Springer, vol. 59(4), pages 1559-1575, November.
    3. Fernandez, Pablo, 2003. "Equivalence of ten different methods for valuing companies by cash flow discounting," IESE Research Papers D/524, IESE Business School.
    4. Ignacio Velez-Pareja & Julian Benavides Franco, 2011. "Cost of Capital when Dividends are Deductible," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(3), pages 309-334.
    5. Fernandez, Pablo, 2004. "Equivalence of ten different discounted cash flow valuation methods," IESE Research Papers D/549, IESE Business School.
    6. Chandra, Situmeang & Erlina, Erlina & Maksum, Azhar & Supriana, Tavi, 2018. "Effect of corporate governance on cost of equity before and after international financial reporting standard implementation," MPRA Paper 87759, University Library of Munich, Germany, revised Mar 2018.
    7. Fernandez, Pablo, 2004. "The value of tax shields is NOT equal to the present value of tax shields," Journal of Financial Economics, Elsevier, vol. 73(1), pages 145-165, July.
    8. Chandra Situmeang & Erlina & Azhar Maksum & Tavi Supriana, 2018. "Effect Of Corporate Governance On Cost Of Equity Before And After International Financial Reporting Standard Implementation," Junior Scientific Researcher, SC Research Publishing SRL, vol. 4(1), pages 1-13, May.
    9. Dirk Beyer, 2018. "A matrix approach to valuation and performance measurement based on accounting information considering different financing policies," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 29(1), pages 37-61, March.
    10. Fernandez, Pablo, 2004. "Value of tax shields and the risk of the net increase of debt, The. Year 2004," IESE Research Papers D/544, IESE Business School.
    11. Simon Krotter & Andreas Schüler, 2013. "Empirische Ermittlung von Eigen-, Fremd- und Gesamtkapitalkosten: eine Untersuchung deutscher börsennotierter Aktiengesellschaften," Schmalenbach Journal of Business Research, Springer, vol. 65(5), pages 390-433, September.
    12. Fernandez, Pablo, 2007. "A more realistic valuation: APV and WACC with constant book leverage ratio," IESE Research Papers D/715, IESE Business School.
    13. repec:dau:papers:123456789/4142 is not listed on IDEAS
    14. Solomon Opare & Muhammad Nurul Houqe & Tony van Zijl, 2021. "Meta‐analysis of the Impact of Adoption of IFRS on Financial Reporting Comparability, Market Liquidity, and Cost of Capital," Abacus, Accounting Foundation, University of Sydney, vol. 57(3), pages 502-556, September.
    15. Magni, Carlo Alberto, 2009. "Splitting up value: A critical review of residual income theories," European Journal of Operational Research, Elsevier, vol. 198(1), pages 1-22, October.
    16. Viswanathan Nagarajan & Prateek Sharma, 2021. "Firm internationalization and long‐term impact of the Covid‐19 pandemic," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(6), pages 1477-1491, September.
    17. Karel Janda, 2019. "Earnings Stability and Peer Company Selection for Multiple Based Indirect Valuation," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 69(1), pages 37-75, February.
    18. Pierru, Axel, 2009. ""The weighted average cost of capital is not quite right": A rejoinder," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(4), pages 1481-1484, November.
    19. Michalis Makrominas, 2015. "The impact of analyst-investor disagreement on the cross-section of implied cost of capital," Australian Journal of Management, Australian School of Business, vol. 40(2), pages 224-244, May.
    20. Axel Pierru & Denis Babusiaux, 2000. "Coût du capital et étude de rentabilité d'investissement : une formulation unique de l'ensemble des méthodes," Working Papers hal-02437423, HAL.
    21. Tammy L. Madsen & Michael J. Leiblein, 2015. "What Factors Affect the Persistence of an Innovation Advantage?," Journal of Management Studies, Wiley Blackwell, vol. 52(8), pages 1097-1127, December.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ris:joefas:0147. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ESAN Ediciones (email available below). General contact details of provider: https://edirc.repec.org/data/esannpe.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.