The constant-growth dividend discount model is best suited for firms that are expected to exhibit stable growth

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The constant-growth dividend discount model is best suited for firms that are expected to exhibit stable growth rates over the foreseeable future. In reality, however, firms progress through life cycles. In early years, attractive investment opportunities are ample and the firm responds with high plowback ratios and rapid dividend growth. Eventually, however, growth rates level off to more sustainable values. Three-stage growth models are well suited to such a pattern. These models allow for an initial period of rapid growth, a final period of steady dividend growth, and a middle, or transition, period in which the dividend growth rate declines from its initial high rate to the lower sustainable rate. P-69

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ISE Investments

ISBN: 9781266085963

13th International Edition

Authors: Zvi Bodie, Alex Kane, Alan Marcus

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