Question

Indicate the expected effect on the valuation of company ABC calculated with the dividend discount model if the expected constant growth rate for dividends is reduced.

Answer 1

A reduction in the expected dividend growth rate in the dividend discount model results in a lower company valuation, as it decreases the present value of projected future dividends.

Step-by-step explanation:

When using the dividend discount model (DDM) to assess the valuation of company ABC, a reduction in the expected constant growth rate for dividends will lead to a lower valuation. This result stems from the model's reliance on the growth rate to calculate the future dividends, which are then discounted to their present value. When the growth rate decreases, the expected future dividends are smaller, and thus, the present value of these dividends is also lower, resulting in a diminished valuation.