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.

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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.

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