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Discuss limitation of the constant dividend growth model

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Reference no: EM132763925

The recent trade war has hit the No Luck Company severely. Management announced plans to scale down its operations. No Luck Company announced that next year's dividend would be $1 per share which is expected to decrease at a rate of 6% forever.

The market price of the stock fell to $3.50 when this development was disclosed.

Problem (a) Calculate the expected return investors hope to get from investing in the stock based on the constant dividend growth model.

Problem (b) Explain one (1) limitation of the constant dividend growth model.

Problem (c) Briefly discuss two (2) reasons for investing in the ordinary shares of a company compared to the company's:

(i) Preferred shares

(ii) Bonds

Reference no: EM132763925

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