How can the Gordon growth model help explain the major decline in stock indexes during 2007-2009?

Question

Quizplus · Accepted Answer

During the financial crisis of 2007-2009, there was an increase in the required return on equities due to higher risk and uncertainty, and a decrease in the expected growth rate of dividends due to lower economic growth and earnings expectations. This is consistent with the Gordon growth model, which states that the stock price is determined by the discounted value of expected future dividends, and any changes in the required return or expected growth rate will affect the valuation of the stock. Therefore, the decline in stock indexes can be explained by the application of the Gordon growth model.

How Can the Gordon Growth Model Help Explain the Major