If one uses the perpetuity model to value stock, one assumes that P0 = P1 = . . . = , implying that the annual return from owning the stock is zero.

Question

If one uses the perpetuity model to value stock, one assumes that P0 = P1 = . . . =  , implying that the annual return from owning the stock is zero.

Quizplus · Accepted Answer

The perpetuity model assumes that the stock will pay a constant dividend indefinitely, and uses the formula P0 = D / r to value it, where D is the annual dividend and r is the required rate of return. It does not assume that the annual return is zero.

If One Uses the Perpetuity Model to Value Stock, One