When applying the Constant Growth Model, the required return must be greater than the rate of growth otherwise the results will be meaningless.

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The constant growth model assumes that the dividend growth rate will remain constant into perpetuity, so it is crucial that the required return (also known as the discount rate or cost of equity) is higher than the dividend growth rate. This is because the model discounts the future dividend payments back to their present value using the required return, and if the required return is lower than the growth rate, the denominator in the formula (the required return minus the growth rate) will be negative, resulting in a negative present value of the stock. Therefore, the required return must be greater than the rate of growth for the model to produce a meaningful valuation.

When Applying the Constant Growth Model, the Required Return Must