15 - 33 conversely, high P/E ratio stocks with low dividend yields to be overvalued. It is considered a conservative model in that it tends to identify fewer undervalued firms as market prices rise relative to fundamentals. The DDM does not allow for the potential tax disadvantage of high dividends relative to the capital gains achievable from retention of earnings. 26(c)ii. The following limitations of the DDM are not addressed by the FCFE model. Both two-stage valuation models allow for two distinct phases of growth, an initial finite period where the growth rate is abnormal, followed by a stable growth period that is expected to last “forever”. These two-stage models share the same limitations with respect to the growth assumptions. First, there is difficulty of defining the duration of the extraordinary growth period. For example, a longer period of high growth will lead to a higher valuation, and there is the temptation to assume an unrealistically long period of extraordinary growth. Second, the assumption of a sudden shift from high growth to lower, stable growth is unrealistic. Given that the assumed total horizon does not shift (i.e., is infinite), the timing of the shift from high to stable growth is a critical determinant of the valuation estimate. Third, because the value is quite sensitive to the steady-state growth assumption, over- or under-estimating this rate can lead to large errors in value.