If the expected ROE on reinvested earnings is equal to k, the multistage DDM reduces to A) V₀ = (Expected dividend yield in year 1)/k. B) V₀ = (Expected EPS in year 1)/k. C) V₀ = (Treasury bond yield in year 1)/k.. D) V₀ = (Market return in year 1)/k.

Question

Quizplus · Accepted Answer

If the expected ROE on reinvested earnings is equal to the required rate of return (k), the value of the stock (V₀) can be calculated as the expected earnings per share (EPS) in year 1 divided by k, as the growth rate of dividends would be zero.

If the Expected ROE on Reinvested Earnings Is Equal to K