Question
In: Finance
Which of the following statements is most correct? Select one: a. The constant growth model is...
Which of the following statements is most correct?
Select one:
a. The constant growth model is often appropriate for companies that never pay dividend.
b. The constant growth model can be applied to companies that expect zero dividend growth rate.
c. The constant growth model is inappropriate for mature companies with a stable history of growth.
d. The constant growth model is often appropriate for companies that the dividend growth rate is larger than its required rate of return on stock.
e. Two firms with the same dividend and growth rate should have the same stock price.
Solutions
Expert Solution
Constant growth model = D1 / Ke -g
The constant growth model is often appropriate for companies that never pay dividend. - This statment in incorrect.
The constant growth model can be applied to companies that expect zero dividend growth rate. -True
The constant growth model is inappropriate for mature companies with a stable history of growth.- False, Constant growth model can be applied with stable history of growth
The constant growth model is often appropriate for companies that the dividend growth rate is larger than its required rate of return on stock.- False, dividend growth rate should be lower that the required rate of return on stock
Two firms with the same dividend and growth rate should have the same stock price. - False, since cost of equity may be different which leads to different prices of stock
The correct answer is option B i.e. The constant growth model can be applied to companies that expect zero dividend growth rate
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