Which of the following statements is correct? A. The constant growth DDM model c

Question

Which of the following statements is correct?

A. The constant growth DDM model can be used to value a stock only if the stock's dividends are expected to grow forever at a constant rate which is less than the required rate of return on the stock

B. If the growth rate is negative, the constant growth DDM model cannot be used

C. The constant growth DDM model may be written as r0 = D0/P0 + g

D. The constant growth DDM model may be written as P0 = D0/(r + g)

E. The constant growth DDM model may be written as P0 = D0/(r - g)

Explanation / Answer

Ans D

P0=D0/(r-g)

P0= market Valuation

D0=Dividend for the year

r=Required rate of return

g=Growth Rate.

This formula is true when the dividend growth rate is less than the required rate of return.

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