Question

In: Finance

Compare a value firm with a growth firm? What are some metrics that one can normally...

Compare a value firm with a growth firm? What are some metrics that one can normally use to characterize firms in the value or growth category? How does valuation of a growth company compare to that of a value company? Can a growth company become a value company? How? Provide the name of a company that you think used to be a growth company that is now a value firm. Compare how your valuation of a growing company would differ from that of a declining company. How does the macro economy affect your valuation of each (inflation, economic growth, value of the dollar)?

Solutions

Expert Solution

Growth stock: A growth stock is the stock of a company which is currently generating positive cash flows. The companies earnings per share are growing rapidly and it is above the industry average. The company is also looking for expansion of operation a reinvesting its cash flows in the company. They generally represent the Large-cap & upper mid-cap.
Valuation: trading above its intrinsic value.

Value stock: it is a stock which is currently trading below its intrinsic value. It is considered as an undervalued stock by the market and investor. The characteristics of the stock are low PE ratio, low PB ratio and high dividend yield. It stocks are generally small-cap stocks.

The value stock will pay more dividend because growth stock will reinvest its dividend to accelerate it's growth and not pay it.

Valuation: trading below its intrinsic value.


Apple comes undergrowth stock.

Growth stock can become value stock under poor economic conditions. When they are fewer opportunities to invest For the company. It mainly happens with cyclic companies.
For example: Tata motors was a growth stock 5 years ago, Now it's a value stock.

Valuation of declining companies is relatively hard to compute, they are computed by the relative valuation of similar declining companies (this method has many limitations).

Growth companies are valued on the ability of present value of all future cash flows (earnings) to shareholders.  


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