Partofthereason foritis thatsmallchangesin thestable
growthratecanchangetheterminalvaluesignificantlyand
the effect gets larger as the growth rate approaches the
discountrateusedintheestimation.Notsurprisingly,analysts
often use it to alter the valuation to reflect their biases.
The fact that a stable growth rate is sustained forever,
however,putsstrongconstraintsonhowhighitcanbe.Since
nofirmcangrowforeverataratehigherthanthegrowthrate
oftheeconomyinwhichitoperates,theconstantgrowthrate
cannotbegreaterthantheoverallgrowthrateoftheeconomy.
Inmakingajudgmentonwhatthelimitsonstablegrowthrate
are, we have to consider three questions.
- Is the company constrained to operate as a domestic
companyordoesitoperate(orhavethecapacitytooperate)
multinationally? If a firm is a purely domestic company,
eitherbecauseofinternalconstraints(suchasthoseimposed
by management) or external (such as those imposed by a
government),thegrowthrateinthedomesticeconomywillbe
thelimitingvalue.Ifthecompanyisamultinationalorhas
aspirationstobeone,thegrowthrateintheglobaleconomy
(oratleastthosepartsoftheglobethatthefirmoperatesin)
willbe thelimitingvalue.Note thatthedifferencewillbe
smallforaU.S.firm,sincetheU.S.economystillrepresents
alargeportionoftheworldeconomy.Itmay,however,mean
thatyoucoulduseastablegrowthratethatisslightlyhigher
(0.25 percent to 0.5 percent) for a Coca-Cola than a
Consolidated Edison.
2.Isthevaluationbeingdoneinnominalorinrealterms?If
thevaluationisa nominalvaluation,thestable growthrate
shouldalsobeanominalgrowthrate,thatis,itshouldinclude