Dear friends, Just to throw some light on earnings growth and dividend growth, as often, dividend growth and earning growth are used interchangeably. Dividend growth and Earning growth are TOTALLY two separate components. 1. If a firm has variability in earnings and constant dividend every year, let say $1 every year, then it is inappropriate to use DDM. The logic behind, it is hard to draw a consistent relationship btw dividend and earning to value a firm 2. If dividend growth and earning growth are consistent ie an understandable relationship can be drawn, then it is appropriate to use DDM. For more details refer CFAI vol.4 pg.306
Understood and agree. But sometimes the calc is not very reasonable. e.g for a newly established company, we sometimes define a target dividend per share/dividend payout ratio in the coming 5 years…the calculation on the 2nd year dividend provided by CFAI is rather stange Orz
Auro Wrote: ------------------------------------------------------- > Dear friends, > > Just to throw some light on earnings growth and > dividend growth, as often, dividend growth and > earning growth are used interchangeably. > > Dividend growth and Earning growth are TOTALLY two > separate components. > > 1. If a firm has variability in earnings and > constant dividend every year, let say $1 every > year, then it is inappropriate to use DDM. The > logic behind, it is hard to draw a consistent > relationship btw dividend and earning to value a > firm > > 2. If dividend growth and earning growth are > consistent ie an understandable relationship can > be drawn, then it is appropriate to use DDM. > > For more details refer CFAI vol.4 pg.306 unless otherwise specified, assume dividend growth is in line with earnings growth.