The model used to value a stock that pays a dividend which increases at a constant rate forever is referred to as which one of the following? Assume the growth rate is less than the discount rate.
A)diminishing valuation growth model
B)increasing valuation growth model
C)constant perpetual growth model
D)irregular growth perpetual model
E)two-stage growth model

Question

Quizplus · Accepted Answer

The constant perpetual growth model is also known as the Gordon growth model. It assumes that the dividend will continue to grow at a constant rate forever. If the growth rate is less than the discount rate, it is referred to as sustainable growth. The formula for the Gordon growth model is V0 = D1/(k-g), where V0 is the current stock price, D1 is the next dividend payment, k is the required rate of return, and g is the constant growth rate.

The Model Used to Value a Stock That Pays a Dividend