Which of the following statements is CORRECT? A) If a stock has a required rate of return r_s = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%. B) The stock valuation model, P₀ = D₁/(r_s -g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. C) The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. D) The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. E) The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

Question

Quizplus · Accepted Answer

The stock valuation model P₀ = D₁/(r_s - g) can be used even if dividends are expected to decline at a constant rate, as long as r_s > g.

Which of the Following Statements Is CORRECT