0
Still curious? Ask our experts.
Chat with our AI personalities
Steve
Ezra
MaxineAdd your answer:
Earn +20 pts
What are the drawbacks for using Gordon growth model in dividend pricing?
Although the model's simplicity can be regarded as one of its major strengths, in another sense this is its major drawback, as the purely quantitative model takes no account of qualitative factors such as industry trends or management strategy. For example, even in a highly cash-generative company, near-future dividend payouts could be capped by management's strategy of retaining cash to fund a likely future investment. The simplicity of the model affords no flexibility to take into account projected changes in the rate of future dividend growth. The calculation relies on the assumption that future dividends will grow at a constant rate in perpetuity, taking no account of the possibility that rapid near-term growth could be offset by slower growth further into the future. This limitation makes the Gordon growth model less suitable for use in rapidly growing industries with less predictable dividend patterns, such as software or mobile telecommunications. Its use is typically more appropriate in relatively mature industries or stock-market indices where companies demonstrate more stable and predictable dividend growth patterns.
How is the supernormal growth pattern likely to vary from normal constant growth pattern in financial management?
Normal, or constant, growth occurs when a firm's earnings and dividends grow at some constant rate forever. One category of non-constant growth stock is a "supernormal" growth stock which has one or more years of growth above that of the economy as a whole, but at some point the growth rate will fall to the "normal" rate. This occurs, generally, as part of a firm's normal life cycle. A zero growth stock has constant earnings and dividends; thus, the expected dividend payment is fixed, just as a bond's coupon payment. Since the company is presumed to continue operations indefinitely, the dividend stream is perpetuity. Perpetuity is a security on which the principal never has to be repaid.
What is the difference between capital asset pricing model and constant growth difference between capital asset pricing model and constant growth approach?
The Constant growth model does not address risk; it uses the current market price, as the reflection of the expected risk return preference of investor in marketplace, whereas CAPM consider the firm's risk, as reflected by beta, in determining required return or cost of ordinary share equity.Another difference is that when constant growth model is used to find the cost of ordinary share equity, it can easily be adjusted with flotation cost to find the cost of new ordinary share capital. whereas CAPM does not provide simple adjustment.Although CAPM Model has strong theoretical foundation, the ease of the calculation of the constant growth model justifies it use.
Hart Enterprises recently paid a dividend It expects to have a nonconstant growth of 20 percent for 2 years followed by a constant rate of 5 percent thereafter The firms required return is 10 percent?
no
When a population multiplies by a constant factor at constant time intervals what it is called?
Exponential growth :)
