Which one of the following is correct concerning the two-stage dividend growth model?
A)The discount rate is based on the coupon rate a firm pays on its outstanding bonds.
B)The first growth rate must be higher than the second growth rate.
C)The time value of money is ignored.
D)The discount rate ignores the risks associated with an individual firm.
E)The discount rate incorporates the risk-free rate of return.

Question

Quizplus · Accepted Answer

The two-stage dividend growth model incorporates the time value of money by using a discount rate that incorporates the risk-free rate of return. This means that the discount rate reflects the opportunity cost of investing in the stock market as opposed to a risk-free investment. Choice A is incorrect because the discount rate is not based on the coupon rate of outstanding bonds. Choice B is incorrect because the first growth rate could be lower or equal to the second growth rate. Choice C is incorrect because the time value of money is a crucial factor in the model. Choice D is incorrect because the discount rate includes the risks associated with the individual firm.

Which One of the Following Is Correct Concerning the Two-Stage