Question

Discuss two advantages and three disadvantages of using a constant-growth DDM. Briefly discuss how the two-stage DDM improves upon the constant-growth DDM.

Answer 1

2. As discussed earlier, the company has two options, whose advantage and disadvantage is as follows: Retain Distribute Advantage Disadvantage Advantage Disadvantage new Retention creates Shareholders prefer current Shareholders gets Distribution results in investments dividend to promised future current income and loss of investment and new I growth. “A bird in hand better I will feel company opportunities and investments propell than two in the bush”. Il paying regular dividend thereby low growth. earnings growth. Retention creates risk to to be less risky. shareholders. 3. The share valuation formula used by Gordon to explain his model is as follows: PO = E(1-b) Ke - br Where, E = EPS; b = Retention ratio; 1-b = Payout ratio; E[1-b] =DPS; Ke = cost of equity and g= bxr.