Which of the following statements is CORRECT? Question options: a) The constant

Question

Which of the following statements is CORRECT? Question options: a) The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. b) 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. c) 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%. d) The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. e) 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.

Explanation / Answer

The correct option is B:

b) 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.

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