Residual Income Valuation

[AndrV]

Hi All,
The single stage residual income valuation model V0 = B0 + {(ROE-r)*B0}/(r-g) makes the assumption of constant dividend and earnings growth rate.
The constant dividend assumption referring to a Stable dividend method or Constant dividend method (Corp Finance) ?
Reason for asking is that the assumption is often rephrased as constant dividend growth rather than constant dividend.
Thanks,
A

 

[Flashback]

IMO, this model is based on GGM and it assumes constant dividend growth by certain growth rate forever.
Constant dividend method is div.payment technique based on dividend payment on constant ratio to earnings no matter to earnings growth rate.
The stable dividend method is a technique of div. payment based on stable growth rate, so I would say that is related to GGM.

 

[Harrogath]

Be careful quoting the DDM assumption. DDM is good when dividends mantains a stable relation with earnings. For example:
Earnings: 50 60 75 100
Dividend: 10 12 15 20
In this case, the DDM is a good valuation approach.
However, if dividends were:
Dividend: 15 15 15 15
This is not a good scenario for a DDM valuation approach.