The value of a supernormal growth firm's common stock is the present value of the
A) supernormal growth period's expected dividends.
B) expected stock price at the end of the supernormal growth period.
C) first year's dividends multiplied by (1 - the supernormal growth rate), divided by the required rate of return.
D) both a and b

Question

Quizplus · Accepted Answer

The value of a supernormal growth firm's common stock is determined by considering both the expected dividends during the supernormal growth period (option A) and the expected stock price at the end of the supernormal growth period (option B). Therefore, both options A and B are needed to determine the present value of the stock's expected future cash flows. Option C is incorrect as it only takes into account the first year's dividends and does not consider the entire supernormal growth period.

The Value of a Supernormal Growth Firm's Common Stock Is