Which of the following statements is CORRECT? Question 4 options: The constant g
ID: 2712977 • Letter: W
Question
Which of the following statements is CORRECT?
Question 4 options:
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 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.
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 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
correct option is "C" -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.
when growth rate is constant(whether positive or negative) ,we can use dividend growth model to calculate current price of stock.
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