The constant-growth dividend discount model can be used both for the valuation of companies and for the estimation of the long-term total return of a stock.
Assume: $20 = Price of a Stock Today
8% = Expected Growth Rate of Dividends
$0:60 = Annual Dividend One Year Forward
a. Using only the preceding data, compute the expected long-term total return on the stock using the constant-growth dividend discount model.
b. Briefly discuss three disadvantages of the constant-growth dividend discount model in its application to investment analysis.
c. Identify three alternative methods to the dividend discount model for the valuation of companies.