Answer: Is only as reliable as the estimated rate of growth.
Explanation:
The Dividend Growth Model depends a lot of the growth rate to determine the price of equity.
The formula goes as follows,
P = D( 1 + g) / ( k - g)
P is the stock price
D is the current dividend
k is the required rate of return
g is the growth rate.
Notice how the growth rate is very influential in this equation and so if it is wrong, the model fails in predicting the price of the stock.
