Question

What valuation model is best used when valuing companies with temporarily high growth rates? Why?

Answer 1

Multistage dividend discounting model will be applied in order to value the company with temporary high growth rates.

These companies with temporary high growth rates should be valued with multistage dividend discount model because-

A. These companies are generally in their introductory phase of life cycle and they are growing at a higher rate which will not be sustainable.

B. They will be having higher opportunities of reinvestment in their initial stages so growth rate will be higher. They will be paying lower dividends in introductory phase and the growth stage.

C. When these companies will be becoming mature companies then growth rate would be slower.They will be paying higher dividend and reinvestment will be lower.

So, These companies are to be used with multistage dividend discounting model when it comes to valuation because these valuation model will be discounting the growth rate of these companies in order with expected rate of return and the dividend paid by these companies, so dividend payments in the initial phases will be lower due to higher reinvestment and dividend payments in the later stages will be higher due to lower investment, so it will be having a balanced valuation approach.