Persistance Factor

[turbo989]

Quick question:
Does the persistance factor (1+r-ω) basically replace the (r-g) in the standard Terminal Value formula? Then we discount the Terminal Value back to find the Present Value today. Will “g” always be 0 in the persistance factor? Maybe that is my question.

 

[S2000magician]

turbo989 wroteoes the persistance factor (1+r-ω) basically replace the (r-g) in the standard Terminal Value formula? Then we discount the Terminal Value back to find the Present Value today. Will “g” always be 0 in the persistance factor?

Let’s do some algebra:
1 + r – ω = r – ω + 1 = r – (ω – 1)
So:
g = ω – 1
Thus, if, for example, ω = 0.8, then g = ω – 1 = 0.8 – 1 = –0.2: the growth rate of residual income is –20% (or, next year’s residual income is 80% of this year’s residual income).

 

[turbo989]

Wow. You truly are a magician. Thank you sir.

 

[S2000magician]

You’re quite welcome.