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In the Non-Constant (Supernormal) Growth model, we assume that dividends will grow at a constant rate...

  1. In the Non-Constant (Supernormal) Growth model, we assume that dividends will grow at a constant rate forever after the nonconstant growth period. Is this realistic? If not, why do we do so?

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Answer #1

No, Dividend can never grow at a constant rate in a real life but we need to adopt through the theoretical aspect of dividend discount model in which after the certain period of the abnormality there is a stability in the payment of dividend and it is to be reflected through constant dividend.

When we are using the dividend discounting model with constant growth,we use the constant dividend even though it is not applicable in real life but when we are using super normal growth then after a certain period of time the dividend will be becoming constant and hence we will be trying to synchronise the overall concept of dividend discount model with each other and we will be trying to normalise the dividend once the supernormality phase will be over for the company and hence we will be trying to normalise the dividend.

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