What is a major drawback of the dividend discount model (DDM)?

The dividend discount model (DDM) has limitations when it comes to applying it to high-growth companies. This model is predicated on the premise that dividends will grow at a consistent rate over time, which becomes problematic when analyzing companies that are experiencing rapid growth. High-growth firms typically reinvest their earnings into expanding their business rather than paying them out as dividends. As a result, these companies may offer little to no dividends during their growth phase, making the DDM ineffective for valuing such organizations.

In contrast, the other choices present misunderstandings about the applicability and scope of the DDM. For instance, the assertion that it can only be used for startups is incorrect, as the model can be applied to established companies with stable dividend policies. The mention that it includes share buybacks reflects a misunderstanding of how the DDM operates, as it is specifically focused on dividends, not distributions through buybacks. Lastly, the claim that it is accurate for any type of company is misleading, as the model's assumptions do not necessarily hold true for companies that do not pay regular dividends or have volatile growth patterns. Thus, the challenges in applying the DDM to high-growth firms clearly highlight its limitations.