How can I find the supernormal growth rate and constant growth rate of a stock?

V = D1/k-g

V = the value of the stock

D1 = the dividend next period

k = the required rate of return

g = constant growth rate

I'm confused on how to combine the constant growth rate formula with the supernormal growth rate.

To find the supernormal growth rate and constant growth rate of a stock, you can follow these steps:

1. Determine the expected dividends for the supernormal growth period: The supernormal growth period is a temporary period of higher growth, usually followed by a transition to a stable growth rate. Estimate the dividends expected during this period.

2. Identify the end of the supernormal growth period: Determine the year or period when the supernormal growth rate is expected to transition to a constant growth rate.

3. Calculate the value of the stock at the end of the supernormal growth period: Use the formula V = D1/(k - g) to calculate the value of the stock at the end of the supernormal growth period. Here, D1 is the expected dividend for the first period after the supernormal growth period, k is the required rate of return, and g is the supernormal growth rate.

4. Calculate the constant growth rate: After the supernormal growth period ends, the stock will experience a constant growth rate. This can be calculated using the formula: g = (1 - Payout Ratio) * Return on Equity. The payout ratio is the percentage of earnings paid out as dividends, and the return on equity is the rate of return the company generates on shareholder equity.

By following these steps, you will be able to find both the supernormal growth rate and the constant growth rate of the stock.

To find the supernormal growth rate and constant growth rate of a stock, you need to understand the concept of the dividend discount model (DDM) and its formula. The DDM is a method used to value stocks by estimating their future dividends and discounting them back to the present value. The formula you mentioned, V = D1/k-g, is a simplified version of the DDM.

Let's break down the formula:

V = the value of the stock (also known as the intrinsic value)
D1 = the dividend expected to be received in the next period
k = the required rate of return, which represents the minimum rate of return an investor expects to earn on the stock
g = the growth rate of dividends assumed to be constant

In the case of supernormal growth, a stock may experience high growth rates initially and then stabilize to a constant growth rate over time. To combine the supernormal and constant growth rates, you would need to calculate the present value of each period's dividends separately and then sum them.

Here's the formula that includes the supernormal growth period and the constant growth period:

V = ∑(Dt / (1+k)^t) + D(T+1) / (k - g)

Where:
∑(Dt / (1+k)^t) represents the present value of the dividends with supernormal growth (from time t=1 to t=T), summed over all periods.
Dt = the dividend expected to be received at time t

D(T+1) / (k - g) represents the present value of the dividend at time T+1, when the stock enters the constant growth phase.

To find the supernormal growth rate, you would need to analyze the historical growth pattern of the company and estimate the growth rate over the supernormal growth period (from time t=1 to t=T). This rate is typically higher than the long-term growth rate.

The constant growth rate (g) can be estimated based on the company's expected long-term stable growth rate, which is usually assumed to be sustainable.

Please note that estimating the growth rates for a stock involves assumptions and requires careful analysis. It's always recommended to conduct thorough research and consider various factors before making investment decisions.