You want to use the dividend discount model with a constant growth rate to value a security

You want to use the dividend discount model with a constant growth rate to value a security. What is the most difficult input to estimate correctly? Why? Does getting this input wrong give significant consequences? Explain.

Expert Solution

If I am trying to use the dividend discount model with constant growth rate to value the security, then it is difficult to estimate the overall growth rate of the dividend because growth rate of the dividend is notproperly estimated because there can never be a constant growth rate in dividend for a longer period of time and it is just for a theoretical purpose.

Any change in the growth rate estimates of the dividend will be providing the the false estimation of market value of the company.

Growth rate can never be ascertained in advance completely because it is not just the growth rate of dividend but the dividend is highly dependent upon the earnings of the company and earnings can never be predicted for a long period in advance so growth rate assumption in respect to dividend discount model is most difficult to estimate.

Yes, getting this input wrong will be giving significant impact on the price of the share because if we are selecting a higher growth rate, then we will be getting a higher current market value of the share and if we are selecting a lower growth rate,then we will be getting a lower market value of the share,so it can significantly impact our investment acceptability criteria.

jeff jeffy answered 2 years ago

You want to use the dividend discount model with a constant growth rate to value a...

You want to use the dividend discount model with a constant growth rate to value a security. What is the most difficult input to estimate correctly? Why? Does getting this input wrong give significant consequences? Explain.

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You want to use the dividend discount model with a constant growth rate to value a security

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