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# Understanding the Differential Growth Model: The Formula

CORPFN-MSA19X

The correct formula to calculate the value of the stock using the differential growth model is:

$$P=[\frac { C }{ (R-{ g }_{ 1 }) } ]*[1-\frac { { (1+{ g }_{ 1 }) }^{ T } }{ { (1+R) }^{ T } } ]+[\frac { (\frac { { Div }_{ T+1 } }{ R-{ g }_{ 2 } } ) }{ { (1+R) }^{ T } } ]$$

Which of the following best explains the different portions of the formula? Select ALL that apply.

A

$[\cfrac { C }{ (R-{ g }_{ 1 }) } ]$ describes the T-year annuity growing at rate ${ g }_{ 1 }$.

B

$[\cfrac { C }{ (R-{ g }_{ 1 }) } ]*[1-\cfrac { { (1+{ g }_{ 1 }) }^{ T } }{ { (1+R) }^{ T } } ]$describes the T-year annuity growing at rate ${ g }_{ 1 }$.

C

$[\cfrac { (\cfrac { { Div }_{ T+1 } }{ R-{ g }_{ 2 } } ) }{ { (1+R) }^{ T } } ]$ describes the discounted value of a perpetuity growing at rate ${ g }_{ 2 }$ that starts in year $T+1$.

D

$P=[\cfrac { C }{ (R-{ g }_{ 1 }) } ]*[1-\cfrac { { (1+{ g }_{ 1 }) }^{ T } }{ { (1+R) }^{ T } } ]+[\cfrac { (\cfrac { { Div }_{ T+1 } }{ R-{ g }_{ 2 } } ) }{ { (1+R) }^{ T } } ]$ describes the discounted value of a perpetuity growing at rate ${ g }_{ 2 }$ that starts in year $T+1$.