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In: Finance

For the non-constant growth stock, is the capital gain yield constant during their non-constant growth period?...

For the non-constant growth stock, is the capital gain yield constant during their non-constant growth period? Why? What’s the horizon value (terminal value)? Is the horizon value a present value? If not, how to get the present value??

Solutions

Expert Solution

No, I don't think that yield should be constant. This is because the capital gains depends on your stock price completely which if you calculate after every year would be different and this would cause the capital gains to change every year. And also the capital gain yield.

The horizon value is difficult to calculate in this case. For horizon value we need the grwoth to be constant after that period. Even for a non-constant growing stock it is not the case that the growth remains non-constant forever. After a certain growth phase it becomes constant and thereafter the horizon value can be calculated.

Horizon value is basically that value which we make an estimate of, at the time from when the perpetual growth starts and we get that value there. Say after 4 years of non-constant growth if stock grows constantly after that then we calculate horizon value for growth of all the upcoming years at t=4.

No, horizon value is not the present value. This is a misconception found at many places. It is the value calculated at that particular time as we did at t=4 in above case. So we would get horizon value at t=4 and then to find its present value simply discount to t=0 using the discount rate and formula for 4 years.


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