Question

1. How might the Discounted Dividend Model present challenges when attempting to calculate the stock price for rapidly growing technology companies? (5 points)

Answer 1

Dividend discount model will be representing changes when we are attempting to calculate the stock price of rapidly growing technology company because those company who are rapidly growing will always be trying to invest their profit back into the business and they will not be repaying any kind of dividend to their shareholders, so there will be a lack of dividend amount which is paid to shareholders and there will be even a constant phase of no dividend because the company want to capitalise upon its growth policy and it wants to invest all of its profits back into the business in order to maximize its value.

Dividend discounting model is only considering the dividend payment in respect to a stock in order to determine the value of the stock, so growth company generally does not associate themselves with payment of dividend because they are always reinvesting their profits back into the business and hence dividend discounting model is not an appropriate representation of the calculation of stock price for rapidly growing technology company.