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Discuss the Constant Growth Model of stock valuation. Include in your discussion the advantages,...

Question:

Discuss the Constant Growth Model of stock valuation. Include in your discussion the advantages, disadvantages and assumptions of the model.

Stock valuation.

Stock valuation refers to the crucial part of the company, which gives information regarding the stock's fair market value. It helps in deciding on buying and selling. There are various methods to calculate the stocks. Stock valuation helps in identifying or forecasting the price.

Answer and Explanation:

Constant Growth Model of stock valuation:

It is defined as the estimation of the values of stock in the market. It helps in evaluating the growth in the dividend and effect on the economy in the long run. It is calculated on present values at a specific increment.

Advantage:

It helps in reporting the rate of total stocks at an instant of time. The dividend discount model also used in constant growth for making future cash flow.

Disadvantage:

The value of stocks keeps changing, so it may be a long process to evaluate the stock variation. The costs are fluctuating.

Assumptions:

The constant growth helps us to identify the dividend yield for an instant. It is mainly calculated with the price earning ratio considering 12 months.


Learn more about this topic:

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Stock Valuation Models: Types & Overview

from Finance 301: Corporate Finance

Chapter 4 / Lesson 5
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