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In this question five-year historical earnings growth of 12% was not used for DVM calculation because it exceeded the cost of equity and it was not sustainable. However I didn’t understand the rationale. Could you explain in detail what it actually means?
The MV that shareholders determine for the shares is determined by the dividends they expect in the future discounted at the rate of return they require (which is the same as the cost of equity).
If they were expecting dividends to grow at 12% in the future, then they would be requiring their return to be in excess of 12%.
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