The H model is useful for firms that are growing rapidly but the growth is expected to decline gradually over time as the firm gets larger and faces increased competition. The assumption of constant payout ratio makes the model inappropriate for firms that have low or no dividend currently.

If the three-stage DDM results in an extremely high value, either the growth rate in the stable growth period is too high or the period of growth (high plus transition) is too long. To solve these problems, an analyst should use a growth rate closer to GNP growth and use shorter high-growth and transition periods.

A sudden decline in high growth rate in two-stage DDM may not be realistic. This problem is solved in the H-model, as the initial high growth rate is not constant, but declines linearly over time to reach the stable-growth rate.

The two-stage DDM has the limitation that a sudden decrease to the lower growth rate in the second stage may not be realistic. Further, the model has the difficulty in trying to estimate the length of the high-growth stage.

FCFE models attempt to estimate the value of the firm to equity holders. The models take in to account future cash flows due to others, including debt and taxes, and amounts required for reinvestment to continue the firm’s operations.

A fairly priced asset would be one that has an expected HPR just equal to the investor’s required return.

Alpha returns are returns in addition to the required returns, so the expected HPR would be higher than the required return.