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Valuation with Temporary Supernormal Growth

# Valuation with Temporary Supernormal Growth - Valuation...

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11-1 Valuation with Temporary Supernormal Growth First evaluate the years of supernormal growth and then use the DDM to compute the remaining years at a sustainable rate Suppose a 14% required rate of return with the following dividend growth pattern Dividend Year Growth Rate 1-3 25% 4-6 20% 7-9 15% 10 on 9%

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11-2 The Value of the Stock (See Exhibit 11.3) Valuation with Temporary Supernormal Growth 9 3 3 3 9 3 3 3 8 2 3 3 7 3 3 6 3 3 5 2 3 4 3 3 3 2 2 ) 14 . 1 ( ) 09 . 14 (. ) 09 . 1 ( ) 15 . 1 ( ) 20 . 1 ( ) 25 . 1 ( 00 . 2 14 . 1 ) 15 . 1 ( ) 20 . 1 ( ) 25 . 1 ( 00 . 2 14 . 1 ) 15 . 1 ( ) 20 . 1 ( ) 25 . 1 ( 00 . 2 14 . 1 ) 15 . 1 ( ) 20 . 1 ( ) 25 . 1 ( 00 . 2 14 . 1 ) 20 . 1 ( ) 25 . 1 ( 00 . 2 14 . 1 ) 20 . 1 ( ) 25 . 1 ( 00 . 2 14 . 1 ) 20 . 1 ( ) 25 . 1 ( 00 . 2 14 . 1 ) 25 . 1 ( 00 . 2 14 . 1 ) 25 . 1 ( 00 . 2 14 . 1 ) 25 . 1 ( 00 . 2 - + + + + + + + + + = i V
11-3 Exhibit 11.3

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11-4 Present Value of Operating Free Cash Flows Derive the value of the total firm by discounting the total operating cash flows prior to the payment of interest to the debt-holders Then subtract the value of debt to arrive at an estimate of the value of the equity Similar to the DDM, we can have We have use a constant rate forever We can assume several different rates of growth for OCF, like the supernormal dividend growth model
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