Which of the statements below is TRUE? A. A problem with using the dividend grow

Question

Which of the statements below is TRUE? A. A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks. B. A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends. C. A problem with using the dividend growth model is that it produces a positive expected return whenever a firm cuts dividends. D. A problem with using the dividend growth model is that it produces a negative expected return whenever a firm increases its dividends.

Explanation / Answer

A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends. The statement is True. The dividend growth model performs the forecast of valuation of a business. It conducts constant (growth) dividend moed whereby, dividend growth rate and rtae of return are assumed to be constant where as, the entities which are not constnat includes earnings and growth rate of a company. The multi-stage dividend discount model can include maximum number of pattern for expected dividends by a company. It requires computation of estimation with less errors and proper accuracy. The Ratio analysis is conducted to estimate the financial status of the company on annual basis. The liquidation value is conducted to determine the actual value of the assets possesed by the company.   

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