Question

It is sometimes assumed in a two-stage dividend growth model that dividend growth drops from a high rate in the first stage to a low perpetual growth rate in the second stage. Comment on the reasonableness of this assumption and discuss what happens if this assumption is violated.

Answer 1

Hello,
In two stage dividend growth model, in 1 stage has an initial unstable growth and second stage has a stable growth which may last forever. In 1 stage growth is volatile and the second stage growth is non- volatile and a stable growth.
This is because at a initial stage of business has the good growth potential in the market, less competitors aid they can be easily grow in 2 digits numbers ( say 30-40 percent) but after a stage growth has to be declined at a single digit number because every company as a peak time at that time company grow at a slow pace. While at the first stage growth was quite aggressive.
If this assumption is violated, means company can grow at a agrressive stage forever, company has the lots of opportunity and projects and all projects give the positive cashflow from there projects.
This would not be possible because at some stage growth is decline and company growth at a sustainable rate.

I hope this clear your doubt.

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