Valuation of ordinary shares is more complicated than valuation of bonds and preference shares because of:
– Uncertainty of dividend unlike interest charges and preference dividends which are certain
– The data for valuation of ordinary shares is historical which may not reflect future expectations.
– A constant stream of dividends per share is assume
– The growth rate is assumed constant and is computed from past dividends.
– The cost of equity/required rate of return on equity is assumed to be constant though it changes over time.