The method used for finding the value of a supernormal growth firm's common stock at the end of the supernormal growth period is similar to that used to find the value of
A) a firm's preferred stock.
B) a firm's common stock, with a constant growth rate for its dividends.
C) a firm's interest-paying bonds.
D) none of the other answers are correct

Question

Quizplus · Accepted Answer

The method used to find the value of a supernormal growth firm's common stock at the end of the supernormal growth period is similar to that used to find the value of a firm's common stock, with a constant growth rate for its dividends. This is because both involve estimating the future cash flows, discounting them to their present value, and adding them up to determine the intrinsic value of the stock. The only difference is that in the case of a supernormal growth firm, the high growth rate is assumed to last for a finite period of time, whereas in the case of a constant growth firm, the growth rate is assumed to be constant in perpetuity.

The Method Used for Finding the Value of a Supernormal