The value of a supernormal growth firm's common stock is the present value of the:
A) first year's dividend after the supernormal growth period.
B) expected stock price at the start 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) expected stock price at the end of the supernormal growth period.

Question

Quizplus · Accepted Answer

The value of a supernormal growth firm's common stock is the present value of the expected stock price at the end of the supernormal growth period. This is because in the supernormal growth period, the company is expected to experience abnormally high growth rates, leading to a higher expected stock price at the end of the period. The present value of this expected stock price is calculated using the required rate of return, which represents the minimum rate of return that an investor expects to earn from the investment. Thus, answer choice D is the best choice.

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