The perils of holding all else constant in perpetual growth equations and playing with individual inputs, not only leads to the use of impossibly high growth rates but also inflates the importance of growth in the terminal value estimation. Growth is not free and it has to be paid for with reinvestment and in the terminal value equation, this effectively means that you cannot leave cash flows fixed and change the growth rate. As the growth rate increases, even within reasonable bounds, the company will have to reinvest more to deliver that growth, leading to lower cash flows, thus making the effect on value unpredictable.
Myth 5.3: Growth is good, more growth is better!
Myth 5.3: Growth is good, more growth is…
Myth 5.3: Growth is good, more growth is better!
The perils of holding all else constant in perpetual growth equations and playing with individual inputs, not only leads to the use of impossibly high growth rates but also inflates the importance of growth in the terminal value estimation. Growth is not free and it has to be paid for with reinvestment and in the terminal value equation, this effectively means that you cannot leave cash flows fixed and change the growth rate. As the growth rate increases, even within reasonable bounds, the company will have to reinvest more to deliver that growth, leading to lower cash flows, thus making the effect on value unpredictable.