If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to

Question

Quizplus · Accepted Answer

If the expected ROE on reinvested earnings is equal to k, the growth rate (g) is zero and the constant growth DDM is not applicable. Therefore, the multistage DDM would be used. The multistage DDM formula is divided into two parts: the present value of dividends during the finite growth phase and the present value of the terminal value. In the first part, the expected EPS in year 1 would be used instead of the expected dividend yield, as EPS is a better measure of earnings available for distribution as dividends. Therefore, the correct formula would be V₀ = (Expected EPS in year 1)/k.

If the Expected ROE on Reinvested Earnings Is Equal to K