Which of the following statements is CORRECT? Answer The constant growth model i
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Question
Which of the following statements is CORRECT?Answer
The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
The stock valuation model, P0 = D1/(rs ? g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.
Explanation / Answer
The stock valuation model, P0 = D1/(rs ? g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. 100% sure ; source http://www.google.com.pk/url?sa=t&rct=j&q=which%20of%20the%20following%20statements%20is%20correct%3F%20answer%20the%20constant%20growth%20model%20is%20often%20appropriate%20for%20evaluating%20start-up%20companies%20that%20do%20not%20have&source=web&cd=1&ved=0CFQQFjAA&url=ftp%3A%2F%2Fftp.cba.uri.edu%2Fclasses%2Ffchen%2FBus320%2FChapter%25209%2520Quiz_ans.doc&ei=QAPUT9HAB4HsrAeFo9D7Dw&usg=AFQjCNG_rLqyH59H7i2te1eY--8-y92wbw&cad=rja
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