Which of the following statements is CORRECT? A) The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. B) If a stock has a required rate of return r_s = 12% and its dividend is expected to grow at a constant rate of 5%,then the stock's dividend yield is also 5%. C) The stock valuation model,P₀ = D₁/(r_s - g),can be used to value firms whose dividends are expected to decline at a constant rate,i.e. ,to grow at a negative rate. D) The price of a stock is the present value of all expected future dividends,discounted at the dividend growth rate. E) The constant growth model cannot be used for a zero growth stock,wherein the dividend is expected to remain constant over time.

Question

Quizplus · Accepted Answer

The correct statement is C, which explains that the stock valuation model $P_0 = \frac{D_1}{(r_s - g)}$ can be used to value firms whose dividends are expected to decline at a constant rate, effectively growing at a negative rate. This model, known as the Gordon Growth Model or the Dividend Discount Model for constant growth, can indeed be applied in scenarios where the growth rate (g) is negative, indicating declining dividends over time.

Which of the Following Statements Is CORRECT