Which of the following statements is CORRECT? A. The constant growth model takes

Question

Which of the following statements is CORRECT? A. The constant growth model takes into condsideration the capital gains investors expected to earn on a stock. B. Two firms with the same expected dividend and growth rates must also have the same stock price C. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. D. If a stock has a required rate of return rs=12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. E. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

Explanation / Answer

. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

The stock valuation model, P0 = D1/(ks - g), can be used for firms which have negative growth rates.

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