ACCA Applied Skills · Financial Management · Models for the valuation of shares
Which of the following is a recognised weakness of valuing a company using the dividend valuation model?
A recognised weakness is that the model assumes dividends grow at a constant rate, which is hard to estimate reliably, and the value is highly sensitive to the growth and cost of equity inputs. It is based on future dividends, not asset values.
- AIt values only tangible assets and ignores future cash flows
- BIt cannot be applied to quoted companies
- CIt assumes dividends grow at a constant rate, which is difficult to estimate reliablyCorrect
- DIt always gives a value equal to the net asset value
Explanation
The model depends on estimating a constant future growth rate and the cost of equity, and results are very sensitive to these. It is based on future dividends, not tangible assets, and can be applied to quoted companies. It does not equate to net asset value.
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