To think critically about: In what circumstances, one would prefer to choose a multistage dividend discount model instead of constant-growth models to value a firm. Introduction: The dividend discount model (multi stage) refers to the technique which is taken into consideration for computation of the stock's intrinsic value by determining different phases of growth associated with the stock is reflecting the dividend paid per share in the phase of high growth, which is required to be discounted to the date of valuation so as to identify the terminal value at the onset of phase of stable growth by making use of the Gordon growth model . The constant growth model or Gordon growth model refers to the technique which is taken into consideration for in identifying the stock's intrinsic value on the basis of future dividends, the growth of which takes place at a constant rate. The model is used to identify the present value of the infinite series of future dividend provided the assumption that the growth of dividend takes place at a constant rate in perpetuity and dividend per share is payable in one year. This model can be used for the organization that possess stable growth rate with respect to the dividend per share because the model assumes a constant growth rate.

Question

Want to see the full answer?

Answer 1

Question

Chapter 13, Problem 2PS

Summary Introduction

To think critically about:

In what circumstances, one would prefer to choose a multistage dividend discount model instead of constant-growth models to value a firm.

Introduction:

The dividend discount model (multi stage) refers to the technique which is taken into consideration for computation of the stock's intrinsic value by determining different phases of growth associated with the stock is reflecting the dividend paid per share in the phase of high growth, which is required to be discounted to the date of valuation so as to identify the terminal value at the onset of phase of stable growth by making use of the Gordon growth model.

The constant growth model or Gordon growth model refers to the technique which is taken into consideration for in identifying the stock's intrinsic value on the basis of future dividends, the growth of which takes place at a constant rate. The model is used to identify the present value of the infinite series of future dividend provided the assumption that the growth of dividend takes place at a constant rate in perpetuity and dividend per share is payable in one year. This model can be used for the organization that possess stable growth rate with respect to the dividend per share because the model assumes a constant growth rate.

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

$5,000 received each year for five years on the first day of each year if your investments pay 6 percent compounded annually. $5,000 received each quarter for five years on the first day of each quarter if your investments pay 6 percent compounded quarterly. Can you show me either by hand or using a financial calculator please.

Can you solve these questions on a financial calculator: $5,000 received each year for five years on the last day of each year if your investments pay 6 percent compounded annually. $5,000 received each quarter for five years on the last day of each quarter if your investments pay 6 percent compounded quarterly.

Now suppose Elijah offers a discount on subsequent rooms for each house, such that he charges $40 for his frist room, $35 for his second, and $25 for each room thereafter. Assume 30% of his clients have only one room cleaned, 25% have two rooms cleaned, 30% have three rooms cleaned, and the remaining 15% have four rooms cleaned. How many houses will he have to clean before breaking even? If taxes are 25% of profits, how many rooms will he have to clean before making $15,000 profit? Answer the question by making a CVP worksheet similar to the depreciation sheets. Make sure it works well, uses cell references and functions/formulas when appropriate, and looks nice.