Using the Gordon growth model,a stock's current price decreases when
A)the dividend growth rate increases.
B)the required return on equity decreases.
C)the expected dividend payment increases.
D)the growth rate of dividends decreases.

Question

Quizplus · Accepted Answer

According to the Gordon growth model, the current stock price is directly proportional to the expected dividend payment and inversely proportional to the difference between the required return on equity and the growth rate of dividends. Therefore, if the growth rate of dividends decreases, the denominator of the equation increases, causing the overall stock price to decrease. Choices A, B, and C would result in an increase in stock price according to the Gordon growth model.

Using the Gordon Growth Model,a Stock's Current Price Decreases When