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.
- 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