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Which method is better: the dividend growth model or the PE method? Why?

Which method is better: the dividend growth model or the PE method? Why?

Solutions

Expert Solution

Price to earnings ratio is better than dividend growth model because Price earnings ratio is not based upon much assumption and it is a pain and simple method.

Price to earning ratio is a ratio of earning per share which are available to the equity shareholders to the market price of the share .The Higher price to earning ratio is a reflection of expensive nature of the company. If a company is making profit, it is a highly common method to be used to calculate the valuation of the company.

Dividend growth model is based upon the assumption that company exists forever and they pay dividends which have a constant rate of growth. This assumption is not true as many of the company which makes a high amount of profits doesn't prefer to pay dividends and instead reinvest into different projects. So this assumption will make the valuation of such companies impossible using this method.

Based on the the limitations of assumptions used in dividend growth model, Price earning method is a better method to be used.

jeff jeffy answered 1 year ago
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