Sum of perpetuities method

<p>The sum of perpetuities method (SPM)   is a way of valuing a business assuming that investors discount the future <a href="/facts/Earnings/NleD23nV">earnings</a> of a firm regardless of whether earnings are paid as <a href="/facts/Dividends/Na89kYjp">dividends</a> or retained.  SPM is an alternative to the <a href="/facts/Gordon_growth_model/N71VT73t">Gordon growth model</a> (GGM)  and can be applied to business or <a href="/facts/Stock_valuation/xlEoMLSp">stock valuation</a> if the business is assumed to have constant earnings and/or dividend growth.  The variables are:
</p>
<ul><li>
  
    
      
        P
      
    
    {\displaystyle P}
  
 is the value of the stock or business</li>
<li>
  
    
      
        E
      
    
    {\displaystyle E}
  
 is a company's earnings</li>
<li>
  
    
      
        G
      
    
    {\displaystyle G}
  
 is the company's constant growth rate</li>
<li>
  
    
      
        K
      
    
    {\displaystyle K}
  
 is the company's risk adjusted <a href="/facts/Interest_rate/Nb4JN7gR">discount rate</a></li>
<li>
  
    
      
        D
      
    
    {\displaystyle D}
  
 is the company's dividend payment</li></ul>

P
        =
        (
        
          
            
              E
              ∗
              G
            
            
              K
              
                2
              
            
          
        
        )
        +
        (
        
          
            D
            K
          
        
        )
      
    
    {\displaystyle P=({\frac {E*G}{K^{2}}})+({\frac {D}{K}})}

Sum of perpetuities method open-in-new

Sum of perpetuities method