Question

Which is more important to the estimated value of the stock, the short-term or long-term growth...

Which is more important to the estimated value of the stock, the short-term or long-term growth rate in dividends? Why?

Homework Answers

Answer #1

Gordon Growth model of equity valuation specifies two or three stages of growth in which the first stage is the super normal growth and the second stage is the long term stable growth rate. The super normal or abnormal growth in dividends does not stay for long and comes back to the normal stable growth rate over a period of time. As such, the major portion and chunk of value of stock comes from the stable long term growth rate in dividends. Hence, long term growth rate is more important in valuation of the stock.

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