What does the perpetuity growth rate represent?

The perpetuity growth rate is defined as a constant growth rate that is used in perpetuity calculations. This rate assumes that cash flows will continue to grow at the same rate indefinitely into the future, allowing for the valuation of an investment or cash flow that is expected to last forever.

In financial modeling and valuation, perpetuities are a crucial concept, particularly in the context of discounted cash flow analysis. The perpetuity growth model allows analysts to estimate the present value of an infinite series of future cash flows growing at a steady rate. The stability of the growth rate is essential, as it simplifies calculations and provides a clear framework for investors to understand how future cash flows will behave over an extended period.

The other options introduce elements such as growth rates relative to GDP, variable growth rates, or declines in cash flow values, which do not accurately capture the essence of what the perpetuity growth rate signifies in financial theory.