Do you agree with this statement? Why or why not?

There are several limitations of the Dividend Growth Model that you need to keep in mind when applying this model to real world stock valuation.One of those limitations is when the growth rate is greater than the discount rate.With the Dividend Growth Model, we would return a negative stock price if the growth rate was greater than the discount rate, as 'R-g' would be less than zero.In reality, this is not the case because if the constant growth rate exceeds the discount rate, then the stock price is extremely large, as the present value of the dividends keeps getting larger (Ross et al., 2019).The simplification of the dividend growth model is invalid, meaning the answers we calculate from the model are "nonsense unless the growth rate is less than the discount rate" (Ross et al., 2019).Overall, the model uses many assumptions such as growth rate, required rate of return, and tax rate.It also assumes dividends and earnings are correlated, resulting in a calculation that may be significantly overvalued or undervalued (Maverick, 2020).

Another limitation occurs when applying this model to a firm paying no dividends.With a no-dividend firm, the application of the dividend discount model is very difficult, as you would need to estimate the date of the first dividend, the growth rate of dividends after that date, and the ultimate merger price (Ross et al., 2019).In my team's group project, we have selected Tesla as our publicly traded company, and they currently pay no dividends.For Tesla, they are waiting to pay dividends because they currently have so many positive growth opportunities with the electric vehicle market to fund.With no dividends being paid, it would be very difficult to use the Dividend Growth Model to determine their stock valuation.As an investor, I would potentially miss out on high-growth companies, such as Tesla, by using the Dividend Growth Model.

Maverick, J.B. (2020, May 15).What are the Drawbacks of the Dividend Discount Model (DDM)?Retrieved fromhttps://www.investopedia.com/ask/answers/042315/what-are-drawbacks-using-dividend-discount-model-ddm-value-stock.asp

Ross, Stephen A., Westerfield, Randolph W., Jaffe, Jeffrey, & Jordan, Bradford D. (2019).Corporate Finance.Twelfth Edition.