Cash flow growth is a key determinant of your projected returns. Forecasting cash flow growth is a highly problematic, albeit essential, component of valuing a property. Of course, the internal rate of return of your investment analysis reflects this growth, as all future cash flows are discounted to reflect their present value.
Digressing into academia for a moment, the Gordon Growth Model (GGM) is a variant of the discounted cash flow model. The GGM assumes that an asset pays a dividend that has a current value of ‘D’ that grows at a constant rate of “G.” The formula is: Price = Dividend / (Rate - Growth).
What the nearby table shows us is that if your property requires a 10% dividend yield and has 0% growth, your required equity valuation is $10. Alternatively, if your expected growth rate of the dividend is 4% in perpetuity, you equity valuation is $16.70. Say you project the two dividend streams for 10 years and utilize the GDM yield to calculate a terminal value. The result is that the IRRs of both scenarios are equivalent.
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