Dividend Discount Model the time Value of Money Concept Case Study Accounting Assignment Help

Assignment Task

Case study – Dividend Discount Model The dividend discount model is a well-known model
for pricing equity shares using the time value of money concept whereby the current fair
price of a share is evaluated as the present value of future expected dividends. In a
relatively simple version of this model, it is assumed that the annual growth rate of
dividends is constant, and the current fair price of a share is obtained as next period’s
dividend divided by the difference between the expected annual return on equity and the
constant annual growth rate of dividends. When the current price of a share is already
known (e.g., by looking up the publicly available market information on the share prices),
the constant dividend growth model (also called Gordon’s model) can be inverted derive the
annual return expected by the equity-holders of a certain stock. This is a methodology
sometimes used to estimate the cost of equity capital for a firm.
(Ques) What do you feel are the most serious methodological problems associated with
Gordon’s model? Outline your argument and carry out a review of relevant financial
academic literature and identify at least two alternative cost of equity estimation
methods (for example, CAPM, Fama-French three-factor model and Carhart four-factor
model, etc.). Can these identified methods be better than Gordon’s model? Argue your
case. (Maximum 1300 words)(12 marks)  

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