Discuss the idea of capitalizing a stream of earnings in perpetuity

Question:

Discuss the idea of capitalizing a stream of earnings in perpetuity. Where is this idea useful? Is there a financial asset that makes use of this idea?

Answer:

Capitalisation of the stream of earning in perpetuity will mean that the company is working upon the assumption that the company will be having the similar for cash flows and the company is also considering that it will have the similar growth rate and the cash flows because the company will be able to maintain higher stability in the overall performance so it is dependent upon The assumption of the company that company will not be getting affected by the economic scenario and it will be able to maintain with the similar growth rate and this level of cash flows in the future so it will be trying to discount upon the stream of payments of perpetual nature at the present and capitalise upon it.

This idea is helpful in order to find out the cash flows of the company and it is also helpful to find out the perpetual value of the company at the present by this discounting upon perpetual cash flow.

Yes, Equities, when we will be trying to find out the valuation of a company using the dividend discount model then we will be asserting that dividend will be constant and we will try to capitalise upon it in order to find out the valuation of the company.

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