Which of the following statements is CORRECT?
A) Two firms with the same expected free cash flows and growth rates must also have the same value of operations.
B) It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.
C) If a company has a weighted average cost of capital WACC = 12%, and if its free cash flows are expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
D) The value of operations is the present value of all expected future free cash flows, discounted at the free cash flow growth rate.
E) The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Question

Quizplus · Accepted Answer

The constant growth model, also known as the Gordon Growth Model, calculates the intrinsic value of a stock based on its future series of dividends that grow at a constant rate, taking into account both the dividend payments and the capital gains from the stock price increase. This model is particularly useful for valuing companies that are expected to grow at a steady and predictable rate.

Which of the Following Statements Is CORRECT