In the constant-growth dividend valuation model,the required rate of return on common stock (i.e.,cost of equity capital)can be shown to be equal to the sum of the dividend yield plus the ____.
A) yield-to-maturity
B) present value yield
C) risk-free rate
D) dividend growth rate
E) none of the above

Question

Quizplus · Accepted Answer

According to the constant-growth dividend valuation model, the required rate of return on common stock is the sum of the dividend yield (the annual dividend per share divided by the current stock price) and the dividend growth rate. Therefore, the correct answer is D) dividend growth rate. A) yield-to-maturity and B) present value yield are not relevant to the constant-growth dividend valuation model, while C) risk-free rate is only used as a component of calculating a company's cost of debt.

In the Constant-Growth Dividend Valuation Model,the Required Rate of Return