Using the constant-growth dividend discount model, comment on the following stat

Question

Using the constant-growth dividend discount model, comment on the following statement: “If the shareholders’ expected rate of return were always twice the growth rate on future dividends, then the value of the dividend next period will always equal the current stock price times the growth rate on future dividends.” True and the dividend next period would have a direct relationship to both the current stock price and the growth rate on future dividends percent. False because the dividend next period would have a direct relationship to the current stock price, but an inverse relationship to the growth rate of future dividends. True and the dividend next period would equal the current dividend plus the current growth rate on future dividends. False because the dividend next period would equal the current dividend plus the current dividend times the growth rate on future dividends. None of the above comments or statements are correct

Explanation / Answer

Using the constant-growth dividend discount model, comment on the following statement: “If the shareholders’ expected rate of return were always twice the growth rate on future dividends, then the value of the dividend next period will always equal the current stock price times the growth rate on future dividends.”

False :

because the dividend next period would equal the current dividend plus the current dividend times the growth rate on future dividends.

ke = D1/P0 + g

where D1 = D0(1 +g) = D0 + D0(g)

Above equation supports what we wrote above

Any doubts, feel free to ask. Thumbs up please

Related Questions

Navigate

• Browse (All)
• Browse U
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.