Question

explain the valuation of constant growth and super normal growth of stock. 300 words

Answer 1

Valuation of constant growth are also known as Gordens Model and dividend discount Model. The constant growth model says that stock related to this will grow perpetually.

It is the model which are used for bringing out the present value of future value of cash flows or earnings.

The formula of Gordens Model is -

P₀ = DPS₁ / Ke - G.

where,

P₀ = Present price of stock.

DPS₁ = Dividend for next period.

Ke = Cost of equity.

G = Growth.

There are three types of Gordens Model. They are-

1. Negative Growth Model

2. Positive Growth Model

3. Zero Growth Model.

A constant growth rate are the stock which dividend are expected to grow with a constant rate for a forseeable period.

A Supernormal Growth Model is the Model in which dividends are issued on the shares and this dividend are incraesing at a higher than normal rate are known as Supernormal Dividend Growth Model.

Growth rate of any economy are higher than as a whole and which has unusal growth during his time.

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