Let's Get Real About the Dividend Growth Model

BVResearch Pro
American Society of Appraisers Business Valuation Review™
Spring 2022 Volume 41, Issue 1 pp. 23-25
Bradford Cornell, PhD
Richard Gerger
valuation methods & approaches
discounted cash flow (DCF), earnings, cost of equity, dividends, growth projections, dividend growth model (DGM)

Summary

The dividend growth model, sometimes called the dividend discount model or discounted cash flow model, is a commonly used tool for estimating the cost of equity capital, particularly in the context of utility rate setting and unitary appraisal. Although the assumption of constant growth in perpetuity is almost never realistic, the constant growth version of the model is still commonly used in practice. However, given modern computing technology, there is no reason not to use the general dividend growth model when estimating the cost of equity. If the constant growth assumption is appropriate in a particular case, it can simply be substituted into the general model. If constant growth is not an appropriate assumption, which will almost always be the case in practice, then the general model should be employed rather than trying to manipulate the constant growth model.
Let's Get Real About the Dividend Growth Model
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