willchangeasgrowth changes.In thissection,we usethe
fundamentalequations fromthepreceding sectionto tryto
address this question.
Growth Effect
Equityvaluesaresensitivetoexpectationsaboutthegrowth
rate duringthe high-growthperiod. Thus,in thepreceding
illustration,theexpectedgrowthrateof 18 percentduringthe
high-growthperiodoffiveyears playsa significantrolein
determining all of the equity multiples. But what if the
expected growth rate is different from our expectations?
Clearly, equityvalueswill increaseif theexpected growth
rateturnsouttobehigherthan 18 percentanddecreaseifit
turnsout to belower. Table8.6 summarizestheeffects of
changing theexpected growth rate during thehigh-growth
period on equity multiples, while holding all other inputs
(payoutratio,returnonequity,costofequity,lengthofthe
high-growth period, and stable growth inputs) fixed.
TABLE 8.6Equity Multiples and Expected Growth Rate