Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

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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.



  1. 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

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