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) a firm's percentage increase in sales growth.

Question

Quizplus · Accepted Answer

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 firm's common stock with a constant growth rate for its dividends. This is because both involve projecting future cash flows and discounting them to the present value using a required rate of return. Preferred stock and interest-paying bonds have fixed dividends/interest payments and their value is calculated differently. Percentage increase in sales growth does not directly relate to the valuation of a firm's common stock.

The Method Used for Finding the Value of a Supernormal