Pn= Price (terminal value) at the end of year
gn= Steady state growth rate forever after yearn
In the case where the extraordinary growth rate (g) and
payoutratioarefixedforthefirstnyears,thisformulacanbe
simplified.
wheretheinputsareasdefinedabove,andgisthegrowth
rate during the high-growth period.
Thesameconstraintthat appliestothegrowthrate forthe
Gordongrowthratemodel(i.e.,thatthegrowthratein the
firmislessthanorequaltothenominalgrowthrateinthe
economy) appliesfor theterminal growthrate (gn)in this
model as well. In addition, the payout ratio has to be
consistentwiththeestimatedgrowthrate.Ifthegrowthrateis
expectedtodropsignificantlyaftertheinitialgrowthphase,
thepayoutratioshouldbehigherinthestablephasethanin
the growth phase. Astable firmcan pay out more of its
earnings in dividends than a growing firm. One way of
estimating thisnew payoutratio isto usethe fundamental
growth model described in Chapter 4.
Algebraic manipulation yields the following stable period
payout ratio: