Darlga Co is partly financed by 7% loan notes which are redeemable at their nominal value of $1,000 per loan note in eight years’ time. Alternatively, the loan notes are convertible after seven years into 110 ordinary shares of Darlga Co per loan note. The ordinary shares of Darlga Co are currently trading at $6·50 per share on an ex dividend basis. The current cost of debt of the convertible loan notes is 8%.

Required:
(b) Discuss the limitations of the dividend growth model as a way of valuing the ordinary shares of a company. (4 marks)