What Is a Growing Perpetuity?

The use condition of the sustainable growth model is that the enterprise must be in a sustainable state. The so-called sustainable state means that the company has a sustainable growth rate and a return on investment capital. Using the perpetual growth model, the value of the enterprise is sensitive to the estimated growth rate. When the growth rate approaches the discount rate, the value tends to be infinite. Therefore, the forecast quality of growth rate and cost of equity is very demanding.

Sustainable growth model

The sustainable growth model assumes long-term stable and sustainable growth. In the case of sustainable growth, corporate value is the next period

Net profit per share = 13.7 yuan / share;

Net equity investment per share = (capital expenditure-depreciation and amortization + increase in operating current assets) × (1-debt ratio) = (100-90 + 4) × (1-20%) = 11.2 yuan / share

Equity cash flow = net profit per share-net equity investment per share = 13.7-11.2 = 2.5 yuan / share;

Equity value per share = (2.5 × 1.06) / (10% -6%) = 66.25 yuan / share.