According to the Gordon growth model,what will be the percentage change in the value of the stock of a company whose current dividend is $10.00 and whose dividends had been expected to grow by 3% per year but now are expected to grow by 1% per year?

Question

Quizplus · Accepted Answer

The Gordon growth model (also known as the Dividend Discount Model for a perpetuity) calculates the value of a stock (P) as D / (r - g), where D is the dividend, r is the required rate of return, and g is the growth rate of the dividend. If the growth rate decreases, the denominator (r - g) increases, leading to a decrease in the stock value. The percentage change in value due to a decrease in growth rate from 3% to 1% can be significant, but without knowing the required rate of return (r), we cannot calculate the exact percentage change. However, given the options, the most realistic change, based on typical values of r, would be -23.7%, which suggests a substantial but not extreme decrease in stock value due to the lower expected growth in dividends.

According to the Gordon Growth Model,what Will Be the Percentage