What assumption do investors typically make about infinitely growing cash flows?

Investors typically assume that infinitely growing cash flows will grow at a constant rate when using the Gordon Growth Model to value businesses with perpetual cash flows. This is based on the idea that once a firm reaches a mature stage, its cash flows are likely to stabilize and grow at a predictable rate, often tied to the long-term growth of the economy or industry in which the company operates.

This assumption simplifies the calculation of the present value of future cash flows and allows investors to calculate a terminal value that reflects the expectation of stable growth beyond a specific forecast period. If cash flows were assumed to vary widely, stop, or decrease, it would complicate the valuation and reduce the reliability of the cash flow forecasts used in DCF analysis. Thus, the correct answer reflects a fundamental aspect of DCF analysis where a constant growth rate is necessary for calculating a sustainable terminal value.