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 can only be used by dividend-paying ﬁrms.

Question

Quizplus · Accepted Answer

The dividend growth model relies on the assumption of a steady and predictable growth rate in dividend payments, which is only applicable to dividend-paying firms. Therefore, the model cannot be used to determine the cost of equity financing for non-dividend-paying firms.

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