Limitations of the Dividend Discount Model
This video discusses some of the limitations of using the Dividend-Discount Model to value a firm. A comprehensive example is presented to illustrate several shortcomings of the DDM, namely that the dividend forecast is based on a firm's future (1) future earnings, (2) dividend payout rate, and (3) number of shares outstanding, all of which are subject to managerial discretion. The video closes by highlighting two alternative models for valuing a firm, the total payout model and the discounted cash flow model, which address these deficiencies.—
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