The stock market, The Theory of Rational Expectations and the Efficient Market Hypothesis - Applying the Dividend discount Model
3 important questions on The stock market, The Theory of Rational Expectations and the Efficient Market Hypothesis - Applying the Dividend discount Model
Explain the constant dividend growth
The simplest forecast for the firm’s future dividends states that they will grow at a constant rate, g, forever.
Give the formula of the price of a stock when we have a constant dividend growth.
Formula:
g= growth rate
Div= dividend
re= equity cost
g= growth rate
Div= dividend
re= equity cost
What are the limitations of the dividend-discount model?
- Uncertainty associated with forecasting a firm’s dividend growth rate and future dividends.
- Small changes in the assumed dividend growth rate can lead to large changes in the estimated stock price.
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