Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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Growth Patterns


Ingeneral,whenvaluingafirm,wecan(1)assumethatthe
firm is already in stable growth, (2) assume a period of
constanthighgrowthandthendropthegrowthratetostable
growth(two-stagegrowth),or(3)allowforatransitionphase
togettostablegrowth(three-stageorn-stagemodels).There
are several factors we should consider in making this
judgment.


Growth Momentum


The choice of growth pattern will influence the level of
currentgrowthinearningsandrevenues.Wecancategorize
firms, based on growth in recent periods, into three groups.


1.Stable-growthfirmsreportearningsandrevenuesgrowing
atorbelowthenominalgrowthrateintheeconomyinwhich
they operate.



  1. Moderate-growth firms report earnings and revenues
    growingataratemoderatelyhigherthanthenominalgrowth
    rateintheeconomy—asaruleofthumb,wewouldconsider
    anygrowthratewithin 8 to 10 percentofthegrowthrateof
    the economy as a moderate growth rate.


3.High-growthfirmsreportearningsandrevenuesgrowingat
a rate much higher than the nominal growth rate in the
economy.


Forfirmsgrowingatthestablerate,thesteadystatemodels
thatassumeconstantgrowthprovidegoodestimatesofvalue.
For firms growing at a moderate rate, the two-stage

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