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constant growth Vs. multi stage growth model for valuation

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Under what conditions would you use a two-or three-stage cash flow model to value a company rather than the constant-growth model?

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Solution Summary

Answers a conceptual question on which valuation model is appropriate under various situations. Three models discussed are DCF models with constant growth, two stage growth and three stage growth (280 words).

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Constant growth model: The constant growth model is used to value firms that are growing at a stable-growth rate i.e. in steady state. The growth rate used in the model has to be reasonable, relative to the nominal growth rate in the economy in which firm operates. The stable growth rate of the firm cannot exceed the economy growth rate in which firm operates by more that one or two percent. In addition, the firm is ...

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