Why is the constant growth formula applicable to so many firms?

rpearso11 -

Yes, it is applicable to many firms but it isn't completely adequate, either. For one, it can only be used for a firm that pays a dividend. There are hundreds of firms that don't pay dividends so the growth model cannot be used on them.

In my own opinion, the constant growth model is hardly an adequate model. Firms rarely use a constant dividend although they would like to. The problem is that in a very tumultuous economy, companies have to scale back dividends when necessary. Look at almost every billion dollar company that has suffered serious losses this year and you'll see that almost all of them have cut their dividend payment to some extent. When this happens, it's really hard to use the constant growth model.

Just my opinion, though.