EOSGMVE - Supernormal High-Flyer Growth Valuation Model...

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Supernormal “High-Flyer” Growth Valuation Model Some companies display initial periods of what could be described as hyper-growth, followed by an extended period of rapid growth, before stabilizing at a more normal and sustainable growth rate. Initial public offerings and start-up companies may follow this model. This pattern reflects growth over their initially small revenue base, the introduction of new product, or the sale of an existing product to a new or under-served customer group. The growth rate of many Internet-related companies would seem to place them in the “high-flyer” category. All companies that fall into this category are not small. Microsoft, Cisco, and American Online, after years of growing at more than fifty percent per year, continue to grow at rates well above twenty percent annually. The following illustration assumes that a firm is expected to grow for two consecutive periods, each of which is five years in length, before assuming a more normal long-term growth rate. Because the cost of capital in each five year period is different reflecting the growth rate of cash flow in that period, each year’s cash flows must be discounted by the
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This note was uploaded on 01/28/2011 for the course FIN 315 taught by Professor Welker during the Spring '09 term at IUP.

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EOSGMVE - Supernormal High-Flyer Growth Valuation Model...

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