by The Non-Constant Growth Dividend Valuation Model is used to estimate the value of a company’s stock that is expected to have varying growth rates of dividend payouts in the future. In contrast to the constant growth dividend valuation model, which assumes a steady growth rate of dividend payouts, the non-constant growth model considers that the dividend growth rate changes over time, which means that future dividends will be different from the present dividend.
Assumptions of the non-constant growth dividend valuation model include:
- The dividend growth rate is expected to change over time.
- The required rate of return on the stock remains constant over time.
- The company will continue to pay dividends into the future.
The non-constant growth dividend valuation model can be used by investors to estimate the fair value of a company’s stock based on their expected dividend growth rates. This model can help investors make informed investment decisions by providing them with a more accurate estimate of a company’s intrinsic value.
However, it should be noted that the non-constant growth dividend valuation model is based on a number of assumptions and may not accurately reflect the future performance of a company’s stock. Investors should always conduct their own due diligence and consider a range of factors when making investment decisions.
The formula for the non-constant growth dividend valuation model is:
P0 = D1 / (1+r1) + D2 / (1+r2)^2 + … + Dn / (1+rn)^n + Pn / (1+rn)^n
Where:
P0 = the present value of the stock
D1 = the expected dividend payout in year 1
D2 = the expected dividend payout in year 2
Dn = the expected dividend payout in year n
Pn = the expected price of the stock at year n
r1 = the required rate of return for year 1
r2 = the required rate of return for year 2
rn = the required rate of return for year n
n = the number of years
The non-constant growth dividend valuation model assumes that the dividend payout will grow at different rates over the years, and the required rate of return will also change accordingly. This model requires an estimation of the future dividend payouts and the expected stock price in each year. The valuation of non-constant growth stocks is more complicated than the constant growth stocks, as the dividends are not growing at a steady rate.
The non-constant growth dividend valuation model is commonly used for companies that have unpredictable dividend growth rates, such as startup companies or those in highly volatile industries. It is also useful for valuing mature companies that are expected to experience fluctuations in their dividend payout growth rates over time.
One limitation of the non-constant growth dividend valuation model is that it assumes that the dividend growth rate will eventually become constant at some point in the future. This assumption may not hold true for all companies, especially those in volatile industries. Additionally, estimating the expected dividend payouts and stock prices in the future can be challenging and may require a significant amount of research and analysis.
