Nonconstant Growth Case Study

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Register to read the introduction… The main reason to consider this case is to allow for “supernormal” growth rates over some finite length of time. As we discussed earlier, the growth rate cannot exceed the required return indefinitely, but it certainly could do so for some number of years. To avoid the problem of having to forecast and discount an infinite number of dividends, we will require that the dividends start growing at a constant rate sometime in the future. For a simple example of nonconstant growth, consider the case of a company that is currently not paying dividends. You predict that, in five years, the company will pay a dividend for the first time. The dividend will be \$.50 per share. You expect that this dividend will then grow at a rate of 10 percent per year indefinitely. The required return on companies such as this one is 20 percent. What is the price of the stock today? To see what the stock is worth today, we first find out what it will be worth once dividends are paid. We can then calculate the present value of that future price to get today’s price. The first dividend will be paid in five years, and the dividend will grow steadily from then on. Using the dividend growth model, we can say that the price in four years will be: P4 D4 (1 g)/(R D5/(R g) \$.50/(.20 .10) \$5 …show more content…
Consequently, Nasdaq is often referred to as an OTC market. However, in their efforts to promote a distinct image, Nasdaq officials prefer that the term OTC not be used when referring to the Nasdaq market. Nevertheless, old habits die hard, and many people still refer to Nasdaq as an OTC market. By the year 2001, the Nasdaq had grown to the point that it was, by some measures, bigger than the NYSE. For example, in the month of June 2001, 38 billion shares were traded on the Nasdaq versus 25 billion on the NYSE. In dollars, Nasdaq trading volume for the month was \$850 billion compared to \$873 billion for the NYSE. However, based on the total value of listed securities, the NYSE was still a good deal bigger, \$12 trillion versus \$3 trillion. The Nasdaq is actually made up of two separate markets, the Nasdaq National Market (NNM) and the Nasdaq SmallCap Market. As the market for Nasdaq’s larger and more actively traded securities, the Nasdaq National Market lists about 4,500 securities, including some of the best-known companies in the world. The Nasdaq SmallCap Market is for small companies and lists about 1,800 individual securities. As you might guess, an important difference in the two markets is that the National Market has more stringent listing requirements. Of course, as SmallCap companies become more established, they may move up to the National Market. Nasdaq Participants As we mentioned previously, the Nasdaq has historically been a dealer market, characterized by competing market makers. In 2001, there were about 500 such market makers, which amounts to about a dozen or so per stock. The biggest market makers cover thousands of stocks. Knight Securities, the biggest of them all (in 2001), traded over 6,000 issues! In a very important development, in the late 1990s, the Nasdaq system was opened

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