In the dividend discount model, V = d/(r-g) what assumptions must be made if the
ID: 2769436 • Letter: I
Question
In the dividend discount model, V = d/(r-g) what assumptions must be made if the model is to be valid?Explanation / Answer
d ie Dividend => Dividend is expected to be received inone year r is cost of equity or required rate of return and it is constant . It can be estimated using the following formula: Risk-free rate + (Market risk premium) * Beta g ir growth factor and is constant, it can be calculated by ( return on investment * retention ratio) All Equity Firm The firm has infinte life ris always greate rthan growth. Firm uses only retained earnings to fiannce its business.