The dividend growth model presented in the text is onlyvalid under the following two assumptions:(1) If dividends are expected to occur forever, i.e., the stock provides dividends inperpetuity;(2) If a constant growth rate of dividends occurs forever.

## Under what assumptions can we use the constant dividend growth model to price a share?

The constant growth model, or **Gordon Growth Model**, is a way of valuing stock. It assumes that a company’s dividends are going to continue to rise at a constant growth rate indefinitely. You can use that assumption to figure out what a fair price is to pay for the stock today based on those future dividend payments.

## What is an underlying assumption of the dividend growth model?

The underlying assumption of the dividend growth model is that **a stock is worth:** **the present value of the future income which the stock generates**. The value of common stock today depends on: the expected future dividends, capital gains and the discount rate.

## How do you calculate dividend payout?

The **dividend payout** ratio can be **calculated** as the yearly **dividend** per share divided by the earnings per share, or equivalently, the **dividends** divided by net income (as shown below).

## How can a payout ratio be greater than 100?

If a company has a dividend payout ratio over 100% then that means that the company is paying out more to its **shareholders than earnings coming in**. This is typically not a good recipe for the company’s financial health; it can be a sign that the dividend payment will be cut in the future.

## What is G in finance?

The **dividend growth rate** is the annualized percentage rate of growth that a particular stock’s dividend undergoes over a period of time. … Knowing the dividend growth rate is a key input for stock valuation models known as dividend discount models.

## What are the limitations of the dividend growth model?

There are a few key downsides to the dividend discount model (DDM), including its lack of accuracy. A key limiting factor of the DDM is that **it can only be used with companies that pay dividends at a rising rate**. The DDM is also considered too conservative by not taking into account stock buybacks.

## What does the value of a common stock today depend on?

The valuation of a common stock today primarily depends on: **the number of shares outstanding and the number of its shareholders**.

## What is the discount rate in equity valuation entirely composed of?

The discount rate in equity valuation is composed entirely of Question 5 options: **the dividends paid and the capital gains yield**.