FINE 3200 Lecture Notes - Lecture 10: Dividend Policy, Abnormal Return, Models 1
Document Summary
Theoretically, dividend discount models can be used to value the stock of rapidly growing companies that do not currently pay dividends; in this scenario, we would be valuing expected dividends in the relatively more distant future. At the other extreme, one would be more likely to choose a dividend discount model to value a mature firm paying a relatively stable dividend. It is most important to use multistage dividend discount models when valuing companies with temporarily high growth rates. These companies tend to be companies in the early phases of their life cycles, when they have numerous opportunities for reinvestment, resulting in relatively rapid growth and relatively low dividends (or, in many cases, no dividends at all). As these firms mature, attractive investment opportunities are less numerous so that growth rates slow. The intrinsic value of a share of stock is the individual investor"s assessment of the true worth of the stock.
