Sunday, 30 April 2017

Valuation of Common Stock with Temporary Supernormal Growth

The correct valuation model to value such "supernormal growth" companies is the multi-stage dividend discount model that combines

  • the multi-period and 
  • infinite-period dividend discount models (Gordon Growth Model).

= Multi-period DDM + Infinite Period (constant growth) DDM
= D1/(1+k)^1 + D2/(1+k)^2 + ..... + Dn/(1+k)^n + Pn/(1+k)^n

Dn = Last dividend of the supernormal growth period
Dn+1 = First dividend of the constant growth period.
Pn = Dn+1 / (k-g) = PV at time n+1 of Dn at a Constant rate of Growth.

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