anonymous
  • anonymous
What if my growth rate, g, is greater than WACC when valuing a company? Assume that cash flow is positive. Or worse, assume it is negative...
Finance
jamiebookeater
  • jamiebookeater
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anonymous
  • anonymous
I'm assuming you're using the dividend growth model. so g is the growth rate of dividends. cost of capital is an estimate of expected returns on your investors' money. so there are two possibilities. First, you're increasing the dividends at a pace faster than the growth of your company. Your company will go bankrupt. Second possibility: your company's growth is outpacing other companies in the same business (company growth > WACC). Unfortunately this can only be a short term phenomenon, reflected only in the first finitely many terms in the sum of discounted cash flows. In the long run, either your company's growth rate converges back to WACC, or the WACC needs to be adjusted.
anonymous
  • anonymous
Hey, thanks for the reply. However, this is where things get tricky - it's not the growth rate of dividends, it's the growth rate of NOPLAT and free cash flow. I'm not valuing the company per se, I'm valuing its strategy. Now, this company hasn't been paying dividends, although it has been making enormous profits. Instead, it has been using these profits to cover the losses from previous years, which had been made by the previous owner. It is now a privately owned company. I calculate g=ROIC*IR, where ROIC=NOPLAT/Invested Capital and IR=Change in Invested Capital/NOPLAT. So, I'm valuing the strategy, not the company itself. That is why the model is different. What do you say?

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