Perpetuity Calculator

A perpetuity is a constant stream of cash payments that continues indefinitely. The Gordon Growth Model (or Growing Perpetuity formula) values these future cash flows by taking the expected dividend and dividing it by the difference between the discount rate and the growth rate. The foundational equation is expressed as: Present Value = Dividend / (Discount Rate - Growth Rate). In this formula, the discount rate represents the required rate of return, while the growth rate accounts for the annual percentage increase in the dividend over time.

Imagine you are evaluating a perpetual preferred stock that currently pays an annual dividend of $5.00 per share. You require a discount rate of 8% to match your investment goals, and you expect the dividend to grow at a steady rate of 3% per year indefinitely. To find the present value, plug these numbers into the formula: Present Value = $5.00 / (0.08 - 0.03). Subtracting the growth rate from the discount rate yields 0.05. Dividing $5.00 by 0.05 gives you a present value of $100.00 per share, meaning that is the maximum price you should pay today for that stream of cash flows.

Always ensure that your discount rate is strictly greater than your growth rate; otherwise, the mathematical formula will yield a negative or undefined result that has no economic meaning. Keep in mind that perpetual growth rates must be realistic, typically staying aligned with long-term macroeconomic GDP growth rather than aggressive short-term company expansion. Finally, remember that market conditions fluctuate, so regularly update your discount rate inputs to reflect changing interest rates and shifting risk profiles.