The H model will NOT be very useful when: A) a firm has low or no dividends currently. B) a firm has a constant payout policy. C) a firm is growing rapidly. The correct answer was A. The H model is useful for firms that are growing rapidly but the growth is expected to decline gradually over time as the firm gets larger and faces increased competition. The assumption of constant payout ratio makes the model inappropriate for firms that have low or no dividend currently. ---- Question: While A is an appropriate answer, why is B not appropriate as well? Constant payout policy is also not useful for an H model–and the answer explanation even says that despite picking A) as the correct answer.
your payout does not matter. current dividend is used for all cases (both the high growth H/2 phase) and in the Post H/2 phase (for the Low growth phase. Dividend payout just defines how much your dividend would be, given earnings. Even if it is constant – no issues.
I also think you are confusing growth with dividend payout.
cpk, youre right–i was mixing up payout ratio and growth rate for some reason. a constant dividend payout is totally appropriate for h model, as long as the growth goes from very high and falls linearly to a low stable rate. it is only when dividends are low or nonexistent that a constant payout is no good–and thats what their answer explains. thanks as always for your help.
dividends being low is ALSO NOT AN ISSUE. You need to have dividends. Dividends being low just means value by the model is LOW. Non-existent dividend - you cannot value (Value=0)
right, got it. so in the correct answer, choice A, its only the second part of the answer choice that makes it the correct answer. The H model will NOT be very useful when: A) a firm has low or no dividends currently