To value the common stock of a supernormal growth firm,an analyst could forecast the length of the supernormal growth period and the dividends paid,and then find the:
A) total of the dividends paid.
B) total of the dividends paid and multiply by the length of the growth period.
C) present value of the supernormal growth period's dividends.
D) present value of the supernormal growth period's dividends and add the present value of the stock price at the end of the growth period.

Question

Quizplus · Accepted Answer

To value the common stock of a supernormal growth firm, the investor needs to forecast the length of the supernormal growth period and the dividends paid during that period. Then, calculate the present value of the dividends paid during the supernormal growth period and add the present value of the stock price at the end of the growth period. This gives the total present value of the stock at the end of the growth period. Therefore, the best choice is D, which suggests finding the present value of the supernormal growth period's dividends and adding the present value of the stock price at the end of the growth period.

To Value the Common Stock of a Supernormal Growth Firm,an