Explain disadvantages of dividend discount model.

Expert Solution

Dividend discount model is a model used extensively in valuation of stocks. According to the model, the price of the stock is equal to the present value of all future dividends.

The key drawbacks associated with the model are :

1) Many companies do not give any dividends to shareholders. Thus, the model cannot be used to calculate the stock price for such companies. Mostly stable and mature companies give predictable dividends.

2) It is based on an assumption that the income for shareholders is only based on dividends. Also, the earning of company and dividend it distributes may not be related.

3) It doesn't account for stock buybacks, which is also one of the ways to distribute earnings to shareholders.

4) Difficulty in projection of dividends for future years. Dividends may vary each year and it is difficult to project with certainly the future dividends.

Comment in case of any queries. Thumbs up would be beneficial.

jeff jeffy answered 2 years ago

Provide the issues or disadvantages of a dividend discount model (Gordon Growth Model) for equity and...

Provide the issues or disadvantages of a dividend discount model (Gordon Growth Model) for equity and give a detailed quantitative example and interpretation. Use the following to calculate, D0=$2.20, g=5%, Beta 1.2, Rf=3%

Discuss the Flaws of the dividend discount model.

true or false and explain. thanks in advance. 1. According to the dividend discount model, the...

true or false and explain. thanks in advance. 1. According to the dividend discount model, the value an investor assigns to a share of stock is dependent upon the length of time the investor plans to hold the stock. 2. If the yield to maturity of a bond is greater then It's coupon rate, the market value of the bond will always be below its par value. 3. the weighted average cost of capital reflects the average cost of the...

Explain the dividend discount model as a basis for stock valuation, including a example in your...

Explain the dividend discount model as a basis for stock valuation, including a example in your initial post. What are the challenges of predicting future dividends, and what other factors affecting stock price are not accounted for in the dividend discount model?

How are the Dividend Discount Model and the Value Bonds Model Similar?

What are the limitations of the dividend discount model? A stock currently pays a dividend of...

What are the limitations of the dividend discount model? A stock currently pays a dividend of $4 for the year. Expected dividend growth is 20% for the next three years and then growth is expected to revert to 4% thereafter for an indefinite amount of time. The appropriate required rate of return is 10%. What is this stock’s intrinsic value? What is the rate of return on an investment that costs $500 and is sold after 1 year for $560?

What are the limitations of the dividend discount model? A stock currently pays a dividend of...

What are the limitations of the dividend discount model? A stock currently pays a dividend of $4 for the year. Expected dividend growth is 20% for the next three years and then growth is expected to revert to 4% thereafter for an indefinite amount of time. The appropriate required rate of return is 10%. What is this stock’s intrinsic value? What is the rate of return on an investment that costs $500 and is sold after 1 year for $560?

Why is it not feasible to use the dividend discount model in the valuation of a...

Why is it not feasible to use the dividend discount model in the valuation of a true growth company? Requirements: 250 words

Explain the advantages of using a two-stage dividend discount model (DDM) to value a share rather...

Explain the advantages of using a two-stage dividend discount model (DDM) to value a share rather than a constant-growth dividend model. Using a simple numerical example, describe one weakness in all DDMs

In addition to the dividend discount model (DDM) and discounted cash flow (DCF) model there are...

In addition to the dividend discount model (DDM) and discounted cash flow (DCF) model there are different other valuation models/metrics. Can you identify some of them? Different models may be appropriate for different firms in different industries. Can you identify which models/metrics may be more appropriate for specific industries/firms?

Question

Explain disadvantages of dividend discount model.

Solutions

Expert Solution

Related Solutions

Provide the issues or disadvantages of a dividend discount model (Gordon Growth Model) for equity and...

Discuss the Flaws of the dividend discount model.

true or false and explain. thanks in advance. 1. According to the dividend discount model, the...

Explain the dividend discount model as a basis for stock valuation, including a example in your...

How are the Dividend Discount Model and the Value Bonds Model Similar?

What are the limitations of the dividend discount model? A stock currently pays a dividend of...

What are the limitations of the dividend discount model? A stock currently pays a dividend of...

Why is it not feasible to use the dividend discount model in the valuation of a...

Explain the advantages of using a two-stage dividend discount model (DDM) to value a share rather...

In addition to the dividend discount model (DDM) and discounted cash flow (DCF) model there are...