Question

1. Perpetuities are not as rare as one might think. Is there any kind of “artificial being” (Chapter 1) that has the possibility of being perpetual? General Electric (GE), be it a corporation or an artificial being, is still going strong after more than 125 years. Could the methodology for determining the present value of a perpetuity be used to value GE, if you know the cash flows from GE?

Answer 1

it is one of the most important feature of a corporation that it has a perpetual existence and even after share holders may come, shareholders may go, but the company goes on forever.

in case of the General electric, it is the one of the oldest companies of the United States and it can be said that it is true to the assumption of perpetual existence because it is still going strong and it is expected to go strong in the future also.

but this exemption does not hold true for most of the organisation because the company does not sustain in the very long term because of the competitiveness and their adaptability to the market conditions changing due to changing economic cycles, so it is better to follow the philosophy of the company life cycle which is always saying the company will have the four stages of its life cycle and which will incorporate the introduction, growth, maturity and decline so the concept of perpetuity can be effective but not completely effective.

One should be determining the value of the company after assuming that it will be running continuously in the long run, by assigning of a discount rate to the perpetuity in order to find out the intrinsic value of the share and the cash flow of the share so, this is a method that has been adopted by various analyst in order to value a company that walways believe upon the assumption that the company is going to continue in the long run and they will always imply discount rate to the perpetuity in order to find out the cash flows associated with the company.