The Gordon dividend discount model:

A. assumes that dividends increase at a decreasing rate.

B. can only value stocks at time 0.

C. cannot be used to value constant dividend-paying stocks.

D. requires that the dividend growth rate be less that the required rate of return.

Question

Toffee

Business

29 October, 06:15

The Gordon dividend discount model:

A. assumes that dividends increase at a decreasing rate.

B. can only value stocks at time 0.

C. cannot be used to value constant dividend-paying stocks.

D. requires that the dividend growth rate be less that the required rate of return.

+3

Answers (1)

Know the Answer?

Ashton Galvan · Answer 1

The correct answer is letter "D": requires that the dividend growth rate be less that the required rate of return.

Explanation:

The Gordon Growth Model is used to calculate the intrinsic value of a stock today, based on the stock's expected future dividends. It is widely used by investors and analysts to compare the predicted stock value against the actual market price. Its formula is:

P = D / r-g

where:

P = current stock price g = dividend growth rate expected r = rate of return D = value of the dividends for the next year

The formula has limitations because the rate of return must be higher than the dividend growth rate expected. Otherwise, the resulting stock price would be negative and the model would be useless.

The Gordon dividend discount model:A. assumes that dividends increase at a decreasing rate.B. can only value stocks at time 0.C. cannot be used to value constant dividend-paying stocks.D. requires that the dividend growth rate be less that the required rate of return.

The Gordon dividend discount model:

A. assumes that dividends increase at a decreasing rate.

B. can only value stocks at time 0.

C. cannot be used to value constant dividend-paying stocks.

D. requires that the dividend growth rate be less that the required rate of return.