You are on page 1of 1

Question: Discuss the assumptions of the dividend

discount model (DDM), the necessary information needed
to conduct equity valuation using the DDM, and give one
alternative method of valuation given in your text that
can be used if all of the necessary information needed for
the DDM valuation is not available.

Solution: DDM model for valuing a share of stock implies
finding the present value of all expected future dividends.
Assumptions of this model are discussed below:-

 Dividends are expected to occur forever, that is, the
stock provides dividends in perpetuity

 Constant growth DDM assumes that dividend growth
is constant and in multistage DDM models can
accommodate any number of patterns of future
streams of expected dividends.

 Supernormal growth occurs only for few years. After
that period of normal growth starts i.e. after that
the growth rate cannot equal or exceed the required
rate of return.

 The investor's required rate of return is both known
and constant.
FCFE and Book Value method are alternatives that can be
used if DDM valuation is not available.