The statement is true. The perpetual growth method assumes that a business will generate cash flows at a constant rate forever.
What is the perpetual growth model?
- It is calculated by multiplying the estimated cash flows for the company's tenth year by one plus the long-term growth rate of the business and dividing the result by the difference between the cost of capital and the growth rate.
- The predicted value of a business after the explicit projection period is known as terminal value. Given that it often accounts for a significant portion of a company's overall value, it is an important component of the financial model. The DCF terminal value calculation has two different approaches: perpetual growth and exit multiple.
- The exit multiple technique presupposes that a business will be sold, whereas the perpetual growth method assumes that a business will create cash flows at a fixed pace indefinitely.
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