Question

Intrinsic Value and Consolidated Valuation

Augmented Dividend:

Discuss why it may not be realistic to assume the augmented dividend will be paid every year and grow at the constant rate forever.  

Answer 1

Dividend is paid out at the discretion of the management. Also it is paid only when there are profits. There may be times when the profits may not be sufficient to pay out dividends. Moreover it is unrealistic to assume that the profits and so dividends will grow at a constant rate. The market conditions and business opportunities change and are extremely volatile.

Also there may be times when the company has investment opportunities available at hand for which it needs to retain the profits rather than give them out as dividends. In such cases the company may not give out dividends at all or may pay out lesser dividends. Hence it is unrealistic to assume that dividend will necessarily be paid each year and that too at a constant growth rate.