mindwhenestimatinga stablegrowthrate.First,sincethe
growthrateinthefirm’sdividendsisexpectedtolastforever,
thefirm’sotheroperatingmeasures(includingrevenuesand
earnings)canalsobeexpectedtogrowatthesamerate.To
seewhy,considertheconsequencesinthelongtermofafirm
whose earnings grow 3 percent a year forever, while its
dividendsgrowat 4 percent.Over time,thedividendswill
exceed earnings. However, if a firm’s earnings grow ata
fasterratethandividendsinthelongterm,thepayoutratio,in
thelongterm,willconvergetowardzero,whichisalsonota
steadystate.Thus,thoughthemodel’srequirementisforthe
expectedgrowthrateindividends,analystsshouldbeableto
substitute the expected growth rate in earnings and get
precisely the same result, if the firm is truly in steady state.
Thesecondissuerelatestowhatgrowthrateisreasonableas
astablegrowthrate.AsnotedinChapter4,thisgrowthrate
hastobelessthanorequaltothegrowthrateoftheeconomy
inwhichthefirmoperates.Thisdoesnot,however,implythat
analystswillalwaysagreeaboutwhatthisrateshouldbeeven
if they agreethat a firm isa stable-growthfirm for three
reasons:
1.Giventheuncertaintyassociatedwithestimatesofexpected
inflation and real growth in the economy, there can be
differences inthebenchmarkgrowth rateusedbydifferent
analysts; forexample,analysts with higherexpectations of
inflationinthelongtermmayprojectanominalgrowthrate
in the economy that is higher.
- Thegrowth rateof a stable-growth company cannotbe
greaterthanthatoftheeconomybutitcanbeless.Firmscan
becomesmallerovertimerelativetotheeconomy.Thus,even