We have discussed a major weakness of the finite period model when estimating a common stock’s...

We have discussed a major weakness of the finite period model when estimating a common stock’s price. Explain

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Expert Solution

There are various weaknesses of the finite period model when estimating a common stock's price:

1. To calculate the common stock price dividend payout and growth perspective matters a lot. As stock prices are highly volatile and changes every minute, it highly difficult to estimate their grwoth over a finite period of time. In perpeuity and infinite period, we can make certain assumptions but in finite period its very dificult to incorporate every price fluctuation in estimation of stock price.

2. Estimationj of common stock's price for the finite period also depends upon dividend being paid to the stock holders but the constant rate at which dividend being paid and the assumption that firm will keep paying saying dividend rate for future finite period is not accurate.

jeff jeffy answered 2 years ago

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