Q:

What is the difference between a constant growth & a non-constant growth dividend model?

A:

Quick Answer

The difference between a constant growth model and a non constant growth model resides in the consideration of the firm's risk. Non-constant growth model directly considers the risk as reflected in beta in determining the required return. The constant growth model does not look at risk. It uses the market price as a reflection of the expected risk-return preference of investors in the market.

 Know More

Full Answer

The constant growth dividend model (also known as the Gordon growth model) and non-constant growth dividend model (commonly known as Capital Asset Pricing) techniques for finding the return are theoretically the same, though in the common practice estimates from the two models do not always agree. These two methods produce different estimates because they require estimates as inputs of other quantities, such as the expected dividend growth rate and the firm's beta.

Another difference is that when the constant growth model is used to find the cost of common stock equity, it can be easily adjusted to for the flotation costs to find the cost of common stock, while the non-constant growth model provides a complex adjustment method. With the constant growth model, a firm overlooks the risk that the company may not be profitable and will have to cut its dividends that may later on reduce the stock price. The non-constant growth model sets up a firm to expect that the market may become weak and would drag the stock price with it.

Learn more about Business Resources

Related Questions

  • Q:

    What is a non-solicitation agreement?

    A:

    A non-solicitation agreement is a type of business contract. These agreements are often used by companies to prevent former employees from soliciting business from current customers and employees.

    Full Answer >
    Filed Under:
  • Q:

    What is the social model of health?

    A:

    The social model of health is a model of health promotion that takes into consideration a person's social, environmental and economic condition. This model has been in use by health care workers since the 1970s. It recognizes that public health needs to consider broader areas, such as the influence of the community and public policy, when working to prevent disease.

    Full Answer >
    Filed Under:
  • Q:

    What are examples of non-programmed decision making?

    A:

    Problems that lack clear definition or structure require non-programmed decision making, and examples of strategies that fit that definition include brainstorming, nominal groups, quality circles, heuristic choices and the Delphi technique. Many organizations run into serious difficulties when they encounter their first problem that is not formulaic in nature, and failure to respond in the proper way to those new problems is one of the hallmarks of an organization in major trouble.

    Full Answer >
    Filed Under:
  • Q:

    When it is appropriate to use a non-NAFTA certificate of origin?

    A:

    Non-NAFTA certificates of origin should be used when shipping goods not manufactured in the United States, Canada or Mexico, which are the three NAFTA countries, to one of these countries. Shipments must be accompanied by bills of lading and other documents required to export goods, materials and food.

    Full Answer >
    Filed Under:

Explore