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Clearly define the (long run) growth rate (g) that is used in the fixed growth period...

Clearly define the (long run) growth rate (g) that is used in the fixed growth period of a discounted cash flow model and the discuss the factors that determine a realistic value for it in any share valuation.

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Expert Solution

The long term Growth rate is denoted by 'g' The long term growth rate shows the rate of percentage at which company can grow in the future years. The company which has high growth rate is better. Growth rate caused increase in future cash flows High Growth is always in the favour of the company It shows the long term survival of the company. High growth rate can increase the Ke cost of equity of the company . It can also increase the value of the share price

Growth Rate shows the future probitability of company in the future. Growth Rate is also useful in calculating the valuation of Shares Price of the share is denoted by "Po". and the Po is calculated by D1/(ke-g) whese ke is the cost of euity and g is the growth rate of the company Growth Rate is very usefull in valuation or estimate future financial position of the companys

The factors that determine a realistic value for it in any share valuation. is cost of equity (ke) Growth rate (g) dividend of previous year (Do) or Dividend of next year (D1) and various other factors to determine growth rate in share valuation are

1 Past stock sales and percent to be valued

2. Public prices of the stock

3. Earning capacity

4.   Potential for dividends

5. Financial condition

6. Presence or absence of intangibles

jeff jeffy answered 2 years ago
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