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.

Expert Solution

GROWTH RATE of the dividend will be most difficult input to be estimated correctly because growth rate of the dividend is assumed to be constant in the long run which cannot be possible in a realistic world because the growth rate of the dividend can never be constant as dividend is completely dependent upon the earning of the company and earning of the company cannot be estimated accurately in the advance so dividend cannot be estimated accurately in the advance, Hence, it can be said that constant growth rate in relationship to the the dividend discount model cannot be estimated accurately.

When we are getting this input wrong, then it can lead to wrong estimation of the share prices because if we are estimating the higher growth rate of the dividend then the overall share price will be higher and if we are estimating the constant growth rate to be lower, than the share price will also be lower, so it will lead to a bad estimation of the share price and it can lead to bad investment.

jeff jeffy answered 2 years ago

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.

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Using the constant-growth dividend discount model, comment on the following statement:

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With respect to the dividend discount model (constant and nonconstant forms), net present value model, FCF...

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

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