What are the most common errors in dividend discount model valuation?
The most common errors in dividend discount model valuation lie in the assumptions about the evolution of the payout ratio as the growth rate changes. Many high growth firms either pay low dividends or no dividends. As the growth rate changes, the dividend payout ratio should rise. If it does not, these firms will not be worth much using these models. • What are the most common errors in FCFE/FCFF model valuation? In cash flow valuation models, the assumptions about net capital expenditures and growth are linked strongly. When one changes, so should the other. In general, there are two types of errors that show up in these valuations. In the first, high growth firms with high net capital expenditures are assumed to keep reinvesting at current rates, even as growth drops off. Not surprisingly, these firms are not valued very highly in these models. In the second, the net capital expenditures are reduced to zero in stable growth, even as the firm is assumed to grow at some rate forever.
