Question

Why is equity valued using a perpetuity formula?

Answer 1

The perpetuity formula is given as:

Price of equity = Div x (1+g)/(r-g)

Here, equity is being valued with the help of just 3 numbers, dividend, growth and cost of capital. We don't require so many assumptions on sales, costs, profits etc. We also assume that the company will grow indefinitely at a reasonable rate which is lower than the growth rate of the country the company is situated in. In no other method, the valuation of equity can be carried out this easily and with so less assumptions and variables. Hence, it is preferred to value equity by this method.