Growing Perpetuity

 

Growing Perpetuity: A valuation of an income stream where annual payments grow as well as having the investment meets a required rate of return of the investment. These growing payments continue forever, "in perpetuity".

Value of a growing Perpetuity:

Annual payment / (Required rate of return - Annual Payment Growth Rate)

This technique is also used to create reference stock valuations for companies. Annualized quarterly returns are used for annual payments. For growth, measures of dividend growth rate are used. For required rate of return, CAPM or WACC models may be used to estimate a suitable risk/return value.

A typical use of this might be to estimate the value of investment returns that are adjusted for inflation. If the growth rate increases the annual payment the growth rate is taken as a positive number and subtracted. If the growth rate decreases the annual payment, the growth rate is taken as negative and added.

A growing Perpetuity can also be helpful to estimate a retirement nest egg using annual income, inflation and plausible investiment return rates.

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