Question

**You want to use the dividend discount model with a
constant growth rate to value security. What is the most difficult
input to estimate correctly? Why? Does getting this input wrong
give significant consequences? Explain.**

Answer #1

We know that the formula to calculate the current share price by dividend discount model

Stock Price P = D1 / (k – g)

Where:

P = the current stock price

D1 = dividend for next year

k = required rate of return or cost of equity

g = constant growth rate of dividends

The variable inputs are the dividend, required rate of return and constant growth rate of dividends. In this model it is assumed that the average growth rate of dividend is constant for infinite time, therefore it is most difficult input to estimate correctly for such a long duration. Getting this input wrong give significant consequences because if constant growth rate of dividends is higher, it will calculate the higher value of stock price and if constant growth rate of dividends becomes equal to required rate of return then the value Stock Price will become infinite.

If you use the constant dividend growth model to value a stock,
which of the following is certain to cause you to increase your
estimate of the current value of the stock?
Question 9 options:
Increasing the required rate of return for the stock.
Increasing the estimate of the amount of next year's
dividend.
Decreasing the firm's long run earnings growth rate.
Increasing the rate of inflation in the economy.
all of the above
none of the above

If you use the constant dividend growth model to value a stock,
which of the following is certain to cause you to increase your
estimate of the current value of the stock?
Question 19 options:
Increasing the required rate of return for the stock.
Increasing the estimate of the amount of next year's
dividend.
Decreasing the firm's long run earnings growth rate.
Increasing the rate of inflation in the economy.
all of the above
none of the above

Plz answer
1.What are some strategies a multinational firm could
undertake to lower its cost of capital? Mention at least two.
Explain why these strategies would lower the cost of
capital.
2.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.
3.You are considering a project in South Korea. The cash
flows are in...

To
use a dividend valuation model, a firm must have a constant growth
rate, and the discount rate must exceed the growth rate. true false

In the dividend discount model, the stock price increases at the
rate of dividend growth (g), and g=ROE*b. Why or why not is it
always in the best interest of stockholders if a company decides to
reinvest a larger portion of its net income (increasing b)? Assume
constant and positive ROE.

Explain the difference between using the zero-growth dividend
valuation model and the constant-growth dividend valuation model
when finding the intrinsic value of common stock and preferred
stock.
How does adding a growth rate to the valuation process affect
the intrinsic value?

In practice, the use of the dividend discount model is refined
from the method presented in the textbook. Many analysts will
estimate the dividend for the next 5 years and then estimate a
perpetual growth rate at some point in the future, typically 10
years. Rather than have the dividend growth fall dramatically from
the fast growth period to the perpetual growth period, linear
interpolation is applied. That is, the dividend growth is projected
to fall by an equal amount...

Suppose you want to use the CAPM model to estimate the discount
rate of a company in order to discount its cash flows but that
company does not trade in the stock market. What would be the
problem in using the CAPM, What would you do in order to solve the
problem?

8. Assume that the constant growth rate dividend discount model
can be applied. You are given that the present value of growth
opportunities (PVGO) for a firm is $5 per share. Its beta is 2.25,
and it expects to earn $2 per share next year. The risk-free rate
is 2% per year and (EM –Rf), the market risk premium is 8%. The
firm’s earnings and dividends are expected to grow at 10% per year
in perpetuity. (1.5 points each for...

Why is it inappropriate to use the standard dividend discount
model (DDM) to value a true growth company?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 10 minutes ago

asked 16 minutes ago

asked 23 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago