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A Flexible Valuation Model Incorporating Declining Growth Rates

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  • Larry C Holland

Abstract

A new model is developed in this paper which demonstrates a flexible method for modeling a cash flow stream with a declining growth rate that asymptotically approaches a mature long-term growth rate. This model can be applied when the initial growth rate in cash flows is temporarily larger than the required rate of return. A simple closed form equation of the valuation model is presented along with an example to illustrate the valuation of future cash flows with a declining growth rate. A comparison is made with the valuation from multi-stage models that have constant growth segments, the H-Model, and the Ohlson-Juettner Model.  This highlights the difference in valuation that results from using this new model.  An example is also included to illustrate how to match a decline curve to a specific forecast of future cash flows.  This new declining growth model provides a flexible and practical approach for valuing equities.

Suggested Citation

  • Larry C Holland, 2018. "A Flexible Valuation Model Incorporating Declining Growth Rates," Accounting and Finance Research, Sciedu Press, vol. 7(1), pages 116-116, February.
    • Handle: RePEc:jfr:afr111:v:7:y:2018:i:1:p:116
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    References listed on IDEAS

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    1. Russell Lundholm & Terry O'Keefe, 2001. "Reconciling Value Estimates from the Discounted Cash Flow Model and the Residual Income Model," Contemporary Accounting Research, John Wiley & Sons, vol. 18(2), pages 311-335, June.
    2. Chen, Kevin C. W. & Chen, Zhihong & Wei, K. C. John, 2011. "Agency Costs of Free Cash Flow and the Effect of Shareholder Rights on the Implied Cost of Equity Capital," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(1), pages 171-207, February.
    3. Hou, Kewei & van Dijk, Mathijs A. & Zhang, Yinglei, 2012. "The implied cost of capital: A new approach," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 504-526.
    4. Myron J. Gordon & Eli Shapiro, 1956. "Capital Equipment Analysis: The Required Rate of Profit," Management Science, INFORMS, vol. 3(1), pages 102-110, October.
    5. James Claus & Jacob Thomas, 2001. "Equity Premia as Low as Three Percent? Evidence from Analysts' Earnings Forecasts for Domestic and International Stock Markets," Journal of Finance, American Finance Association, vol. 56(5), pages 1629-1666, October.
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    Cited by:

    1. Joerg Wilde, 2018. "Generalization of the Annuity Factor," Accounting and Finance Research, Sciedu Press, vol. 7(2), pages 1-83, May.
    2. I-Cheng Yeh & Yi-Cheng Liu, 2023. "Exploring the growth value equity valuation model with data visualization," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 9(1), pages 1-37, December.

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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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