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HomeNet Inc. paid a $4 last year and the stock is currently selling for $60. If...

  1. HomeNet Inc. paid a $4 last year and the stock is currently selling for $60. If investors require a 15% return on their investment from buying HomeNet stock, what growth rate would HomeNet have to provide the investors?
  2. What are the limitations of the dividend discount model?
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Answer #1

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Following are the limitations of the dividend discount model-

  • Lack of accuracy
  • It can only be used with companies that pay dividends at a rising rate
  • It is too conservative as it does not take into account stock buybacks
  • Many assumptions required
  • May not be related to earnings

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