Let's Get Real About the Dividend Discount Model

9 Pages Posted: 12 Mar 2022

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Richard Gerger

Cornell / Gerger Consulting

Date Written: January 20, 2022

Abstract

The dividend growth model (“DGM”), sometimes called the dividend discount model or discounted cash flow model, is a commonly used tool for estimating the cost of equity capital, particularly in the context of utility rate setting and unitary appraisal. Although the assumption of constant growth in perpetuity is almost never realistic, the constant growth version of the model is still commonly used in practice. However, given modern computing technology, there is no reason not to use the general dividend growth model when estimating the cost of equity. If the constant growth assumption is appropriate in a particular case, it can simply be substituted into the general model. If constant growth is not an appropriate assumption, which will almost always be the case in practice, then the general model should be employed rather than trying to manipulate the constant growth model.

Keywords: Dividend Growth Model, Valuation, Cost of Equity

JEL Classification: G10, G30

Suggested Citation

Cornell, Bradford and Gerger, Richard, Let's Get Real About the Dividend Discount Model (January 20, 2022). Available at SSRN: https://ssrn.com/abstract=4015531 or http://dx.doi.org/10.2139/ssrn.4015531

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

Richard Gerger

Cornell / Gerger Consulting ( email )

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
325
Abstract Views
933
Rank
170,482
PlumX Metrics