an expectedinflationcomponent. If thevaluationis a real
valuation,the stablegrowth rate willbe constrained to be
lower. Again, using Coca-Cola as an example, the stable
growthratecanbe ashighas 4 percentif thevaluationis
done in nominal U.S. dollars but only 2 percent if the
valuation is done in real terms (at least in early 2006).
3.Whatcurrencyisbeingusedto estimatecashflowsand
discountratesinthevaluation?Thelimitsonstablegrowth
willvarydependingonwhatcurrencyisusedinthevaluation.
Ifahigh-inflationcurrencyisusedtoestimatecashflowsand
discountrates,the stablegrowth ratecan be muchhigher,
sincetheexpectedinflationrateisaddedontorealgrowth.If
alow-inflationcurrencyisusedtoestimatecashflows,the
limitsonstablegrowthwillbemuchlower.Forinstance,the
stablegrowthratethatwouldbeusedtovalueEmbraer,the
Brazilian aerospace company, will be much higher if the
valuation is done in BR than in U.S. dollars.
Thestablegrowthratecannotexceedthegrowthrateofthe
economyinwhichafirmoperates,butitcanbelower.There
isnothingthatpreventsusfromassumingthatmaturefirms
willbecomeasmallerpartoftheeconomyanditmay,infact,
be themorereasonable assumptiontomake. Notethat the
growthrateofaneconomyreflectsthecontributionsofboth
young,higher-growthfirmsandmature,stable-growthfirms.
Iftheformergrowataratemuchhigherthanthegrowthrate
of the economy, the latter have to grow at a rate that is lower.
Settingthestablegrowthratetobelessthanorequaltothe
growthrateoftheeconomynotonlyistheconsistentthingto
do,butitalsoensuresthatthegrowthratewillbelessthanthe
discountrate.Thisisbecauseoftherelationshipbetweenthe