How Low Can It Go?

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4. “What other variations of the DDM can one use and Why?” asked Dwayne. What should Jonathan’s response be?
Jonathan’s response should be like this, “The other variation of the DDM can one use is by calls for recognizing that the dividend payments may grow as a small but constant rate. With this approach, the equity of the company is considered to be a perpetuity. Understanding which scenario is applicable to the stock under consideration is very important, as it will impact how the dividend payment relates to the company’s equity. The reason of this variations are ways to account for factors that are unique to the company in question, and how those factors impact the equity of the company. Because the model can be calculated using various data above and beyond the basic models, not all financial analysts consider this approach to be especially helpful.”

5. “Why are you using dividends and not earnings per share, Jonathan?” asked Dwayne. What do you think Jonathan would have said?
I think Jonathan would said that the dividends per share are usually easily found on quote pages as the dividend paid in the most recent quarter which is then used to calculate the dividend yield. Dividends over the entire year (not including any special dividends) must be added together for a proper calculation of dividends per share, including interim dividends. Special dividends are dividends which are only expected to be issued once so are not included. The total number of ordinary shares outstanding is sometimes calculated using the weighted average over the reporting period. While earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. Not only that, the most common use of earnings per share is to calculate the PE ratio, which puts earnings per share into context by comparing it to the share price. There are a number of...
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