Special Cases of Common Stock Valuation II

Common stock valuation with variable growth is more accurate for firms with changing growth phases and dividend patterns.

The Multi-Stage Dividend Discount Model is often used for this type of valuation.

It divides the growth period into phases of high growth, stable growth, and transitional growth, where growth slows down.

For example, consider Alpha Corp, a company currently experiencing rapid growth.

Alpha Corp plans to pay a dividend of one dollar per share.

It expected a dividend growth rate of fifteen percent for the first three years, after which it will indefinitely change to a stable dividend growth rate of five percent. The investor's required rate of return is ten percent.

Here, the dividends are calculated for the first three years of the high-growth phase and discounted to present value.

Next, the present value of dividends is calculated for the stable phase from the fourth year onwards.

Lastly, the sum of all the values is calculated to arrive at Alpha Corp's stock's intrinsic value, which is twenty-seven dollars and thirty-five cents.

This method provides a comprehensive valuation of stock by offering a clearer picture.