Question

sum of perpetuities method

what is /definition/negative/positve/example/ equatio

every thing explain plz hurry up

Answer 1

Sum of perpetuities method one of the way through which a company is valued. The method assumes that the future earnigs are discounted by investors even if it is paid as dividends or held as retained earnings.

The formula to obtain the value of a company through this method is as below.

where P= value of the company ; E=Earnings ; G=constant growth rate ; K= risk adjusted discount rate

D= dividend payment

Advantage is that even if the company pays dividend, or not we can use this model unless Dividend discount model in which it can be used only for companies paying constant dividend yield.

The limitation of SPM(Sum of perpetuities method) is that all the factors in the equation should be held constant for a longer period of time for the model to give valid results. This might be unreasonable many times during valuation. The model also demand a constant risk profile and capital structure for the company.