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Hello,
In Kaplan, this statement regarded as an assumption of DDM: “Dividends show either constant growth or zero growth.” (Exam kit, Section B, Question 28).
I wonder if negative dividend growth rate is also allowed by the model.
And also, cost of equity being equal to growth rate is not allowed, right?Thanks,
GigaIt is the expected future dividends (and therefore the expected future growth rate) that determines the market value.
If the expected future growth rate was negative then nobody would want to buy the shares and the market value (in theory) would be zero.
If the expected future growth rate was higher then shareholders would require a higher return (and the cost of equity is determined by the shareholders required rate of return).As a result neither of these would occur in the exam 🙂
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