ratio stocks with high dividend yields to be undervalued and conversely high

Ratio stocks with high dividend yields to be

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Chapter 13 - Equity Valuation 13-16 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 indefinitely.. These two-stage models share the same limitations with respect to the growth assumptions. First, there is the 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 form high growth to lower, stable growth is unrealistic. The transformation is more likely to occur gradually, over a period of time. Given that the assumed total horizon does not shift (i.e., is infinite), the timing of the shift form 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. The two models share other limitations as well, notably difficulties inaccurately forecasting required rates of return, in dealing with the distortions that result from substantial and/or volatile debt ratios, and in accurately valuing assets that do not generate any cash flows. 25.
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