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Dividend growth model

   Also found in: Acronyms 0.01 sec.
Dividend growth model
An approach that assumes dividends grow at a constant rate in perpetuity. The value of the stock equals next year's dividends divided by the difference between the required rate of return and the assumed constant growth rate in dividends.


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Assuming normally distributed shocks, the likelihood functions for the two models are very similar, with a slight advantage in favor of the nonstationary real dividend growth model.
Furthermore, if capital gains are induced by retentions, then the dividend versus capital gains split may be viewed as an arbitrary division of earnings, and so an earnings yield model of the cost of equity capital may, under certain circumstances, be equivalent to a dividend growth model of the cost of equity (Karathanassis, 1983).
Methodology and Data In this section, we discuss our approach for estimating ex ante expected returns using the constant dividend growth model and the consensus of financial analysts' five-year earnings growth forecasts available through IBES.
 
 
 
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