One of the assumptions of the constant growth dividend valuation model is that the _____.
A) investor's required rate of return is equal to the expected dividend yield
B) required rate of return is greater than the dividend growth rate
C) required rate of return increases at a constant rate
D) dividend rate (in dollars) will remain constant

Question

Quizplus · Accepted Answer

The constant growth dividend valuation model assumes that the required rate of return is greater than the dividend growth rate. This is because the model calculates the present value of future dividends, which must be discounted at a rate that reflects the investor's required rate of return. If the dividend growth rate is greater than the required rate of return, the present value of future dividends would exceed the price of the stock, leading to an arbitrage opportunity. Therefore, the model assumes that the required rate of return is greater than the dividend growth rate to ensure that the stock is fairly valued.

One of the Assumptions of the Constant Growth Dividend Valuation