Abstract

A variety of mathematical models for growth stock valuation have been developed in recent years. Most of the methods advanced are theoretically sound, but they are so difficult to apply in practice that they have had little impact on actual investor decision making. The purpose of this article is to show how a workable approach to investment valuation may be expressed in a series of iso-yield curves. The iso-yield format provides a consistent method of choosing between stocks of varying growth rates. The method is operationally feasible and theoretically accurate and has the added advantage that it provides visual perspective on the meaning of the value of growth. Iso-yield curves are based on the assumption that profitability over the life of the investment is the goal of common stock investors. Maximum profitability will be achieved by selecting stocks for which the rate of discount equating all future cash recoveries with present cash outflows is at a maximum. When this approach is used to select between alternative securities with varying degrees of cash dividend receipts within the investment period, the approach implicitly assumes that cash dividends may be reinvested at the indicated rate of discount.