Growth rate is the measure of the increase in value of an investment or a company's earnings over a specific period. It is typically expressed as a percentage.
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Growth rate can be calculated using historical data to forecast future performance.
Compounded annual growth rate (CAGR) is commonly used to determine an investment's mean annual growth rate over a specified time period.
In dividend discount models, growth rate helps estimate the present value of expected future dividends.
A higher growth rate generally indicates better financial health and greater potential returns for investors.
Economic conditions, market trends, and company-specific factors can significantly influence growth rates.
Review Questions
What formula is commonly used to calculate the compounded annual growth rate (CAGR)?
How does the growth rate affect stock valuation in dividend discount models?
What factors can impact a company's growth rate?
Related terms
Present Value: The current worth of a future sum of money given a specified rate of return.
Dividend Discount Model (DDM): A method used to value a stock by assuming constant or varying dividends that are discounted back to their present value.
Future Value: The value of an asset or cash at a specified date in the future based on an assumed rate of growth.