You are attempting to value a stock in an industry where ﬁrms are generating exceptional dividend growth, but this growth is expected to slow to an equilibrium growth rate in about ﬁve years. Of the
Stock valuation models studied, the most appropriate is the _______________.

Question

Quizplus · Accepted Answer

The supernormal growth model is the most appropriate in this situation because it assumes that the exceptional dividend growth will continue for a limited period of time before converging to a stable, long-term growth rate. This model is more accurate than the perpetual growth model, which assumes a constant growth rate indefinitely. The constant growth model is not appropriate in this scenario since the expected growth rate is not constant. The perpetuity model is also not appropriate since it assumes a constant cash flow indefinitely, which is not realistic in this situation. The preferred stock model is not relevant since the question does not mention anything about preferred stock.

You Are Attempting to Value a Stock in an Industry