In the constant growth dividend valuation model, the required rate of return on a common stock is equal to the sum of the ____.
A) capital gains yield and cost of capital
B) present value yield and dividend yield
C) cost of capital and dividend yield
D) capital gains yield and dividend yield

Question

Quizplus · Accepted Answer

The constant growth dividend valuation model, also known as the Gordon growth model, assumes that a company's dividends will grow at a constant rate indefinitely. It calculates the intrinsic value of a stock based on its expected future dividends and the required rate of return of the investor. The required rate of return on a common stock is equal to the sum of the capital gains yield and dividend yield. The capital gains yield is the rate at which the stock price is expected to grow, while the dividend yield is the annual dividend payment divided by the current stock price. Therefore, choice D is correct as it includes both components of the required rate of return.

In the Constant Growth Dividend Valuation Model, the Required Rate