We cannot use the dividend discount approach to estimating the cost of equity capital when the expected growth rate exceeds the required rate of return.

Name: We cannot use the dividend discount approach to estimating the cost of equity capital when the expected growth rate exceeds the required rate of return.
Brand: Quizplus
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Question

Quizplus · Accepted Answer

The dividend discount model assumes that the growth rate is less than the required rate of return; otherwise, the model would produce a negative or undefined value for the cost of equity.

We Cannot Use the Dividend Discount Approach to Estimating the Cost