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What would be reasonable rates of return for the computation of perpetuity in firm valuation?

I tend to google FMI's expected World GDP growth rate, but I can't always find results.

Would someone have any suggestions of methodologies for the estimation of these rates and sources for the required inputs?

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  • $\begingroup$ I am not sure I understand the question, I think you are trying to estimate a long run steady state growth rate for the dividends of a firm? i.e. from year T to infinity, dividends will grow at rate $g_\infty$ where T is a large number. This is what you need to estimate? $\endgroup$ – Alex C Jun 3 '16 at 4:05
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It should be related to your specific valuation model. The most common earnings related models use a risk free rate minus 3%.

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As a standard reference (in the back of my head) I use for Swedish and U.S. equities, 7% real return assuming no growth rate in FCFE.

So if we assume the entity will produce $100m per year in fcfe going forward with no growth rate, then the market value of equity is 100/0.07 = 1729. The 7% comes from 2% risk free rate + 5% risk premium (adjusted for inflation), obviously if the interest rates never return to historical levels 7% is a bit high.

This is a huge subject, people write their PhD thesis in Finance on this.

A good book is: https://www.amazon.com/Value-Investing-Graham-Buffett-Beyond/dp/0471463396

The best course available on the planet is: https://www.coursera.org/course/assetpricing

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