Discuss the disadvantages of Dividend Growth Model Approach

Finance Jan 08, 2021

Discuss the disadvantages of Dividend Growth Model Approach.

Expert Solution

There are many disadvantage of Dividend growth model

1. The Dividend growth model assumes that the dividend grows at a stable rate which sometime is not possible due to fluctuations in the earnings and external factors.

2. Dividend growth model doesn't take into account the non dividend factors and only applicable to companies which pays dividend, which reduces the efficacy of the model because many firm has higher retention ratio and unable to distribute dividends.

3. It also assumes that the Cost of equity should be greater than the growth rate which may not always be true.

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