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How can the DCF method be applied if the growth rate was not constant? (detailed explanation...

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Finance

How can the DCF method be applied ifthe growth rate was not constant? (detailed explanation needed)

I found short answer for this as: "We will find the PV of thedividends during the nonconstant growth period and add this valueto the PV of the series of inflows when growth is assumed to becomeconstant." But I am looking for a detailedexplanation.

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3.9 Ratings (515 Votes)
DCF method can be applied either on the dividends or on the freecash flows Lets understand for the free cash flows Whatever wedo will be applicable for the dividends as wellUnder discounted cash flow analysisto value a business or a business segment or a businesscombination we look at two different types of free cash flowsFree cash flow to the firmFCFF given byThis is post tax operating cash flowafter capital expenditureFree cash flow to equityholder FCFE given byIf there is a preference sharecapital in the company FCFE formula will also incorporatepreferred stock dividend and will be given byFCFE is a cash flow which is freefrom all kinds of claims It is a cash flow that ordinary equityholder can pocket safely Its the residual cash flow left aftermeeting all the liabilities claims and investment needs of thecompanySteps involved in discounted cashflow valuationProject FCFF FCFE for areasonable horizon of projectionLet the free cash flows be represented by C    See Answer
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How can the DCF method be applied ifthe growth rate was not constant? (detailed explanation needed)I found short answer for this as: "We will find the PV of thedividends during the nonconstant growth period and add this valueto the PV of the series of inflows when growth is assumed to becomeconstant." But I am looking for a detailedexplanation.

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