Question

In a valuation of a nonconstant dividend growth stock, the terminal value represents the:

• point at which the present value of future dividends equals zero.

• present value of the stock in that year.

• maturity date of the stock.

• highest value that the stock will attain.

Answer 1

HI,

A non constant dividend growth stock means company with uneven growth rate. Many companies exists which is having very high growth in initial year until they become stable and their growth rate just gets settled.

So their stock valuation = Present value of stock at the time of high growth +terminal value

In which terminal value will be present value of stock from which the growth becomes stable to infinite times. So here 2nd option is correct. Terminal value is present value of stock in that year(present value of future dividends in that year).

Thanks

Thanks