Which of the following is a limitation of the dividend-discount model? A) It can

Question

Which of the following is a limitation of the dividend-discount model?

A) It cannot handle negative growth rates.

B) It requires accurate dividend forecasts, which is not possible.

D) It does not consider past earnings and performance.

C) It requires that the growth rate always be higher than the required rate of return, which is not realistic.

A) It cannot handle negative growth rates.

B) It requires accurate dividend forecasts, which is not possible.

D) It does not consider past earnings and performance.

C) It requires that the growth rate always be higher than the required rate of return, which is not realistic.

Explanation / Answer

B) It requires accurate dividend forecasts, which is not possible.

Drawbacks of using the dividend discount model (DDM) include the difficulty of accurate projections, the fact that it does not factor in buybacks and its fundamental assumption of income only from dividends.

B) It requires accurate dividend forecasts, which is not possible.

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