As a means of determining a firm's cost of equity financing for an investment, a weakness in the dividend growth model is that the model is highly sensitive to the growth rate of the firm.

Question

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The dividend growth model calculates a firm's cost of equity by dividing the dividend per share by the current market value per share and adding the dividend growth rate. This model is highly sensitive to the growth rate assumption, as small changes in the growth rate can significantly affect the calculated cost of equity, making it a potential weakness in its application.

As a Means of Determining a Firm's Cost of Equity