Which of the following statements is FALSE? The dividend discount model values t
ID: 2800155 • Letter: W
Question
Which of the following statements is FALSE?
The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.
One assumption used to forecast for the firm's future dividends is that the dividends will grow at a constant rate, g, forever.
Compared to bond coupon payments, there is a lot of uncertainty associated with any forecast of a firm's future dividends.
According to the constant dividend growth model, the value of the firm depends on the current dividend level divided by the equity cost of capital plus the growth rate, g.
The dividend discount model values the stock based on a forecast of the future dividends paid to shareholders.
One assumption used to forecast for the firm's future dividends is that the dividends will grow at a constant rate, g, forever.
Compared to bond coupon payments, there is a lot of uncertainty associated with any forecast of a firm's future dividends.
According to the constant dividend growth model, the value of the firm depends on the current dividend level divided by the equity cost of capital plus the growth rate, g.
Explanation / Answer
According to the constant dividend growth model, the value of the firm depends on the current dividend level divided by the equity cost of capital minus the growth rate, g.
Price of stock = Dividend/(R-g) where R is the equity cost of capital, and g is the growth rate of the dividend.
The following statement is false:
According to the constant dividend growth model, the value of the firm depends on the current dividend level divided by the equity cost of capital plus the growth rate, g.
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