The underlying assumption of the dividend growth model is that a stock is worth
A)the present value of the future income provided by that stock.
B)the same amount to every investor.
C)an amount computed as the next annual dividend divided by the market rate of return.
D)an amount computed as the last annual dividend divided by the required rate of return.
E)the same amount as any other stock that paid the same dividend this year.

Question

Quizplus · Accepted Answer

The dividend growth model assumes that a stock is worth the present value of the future income that it will provide, specifically in terms of future dividends. This is calculated by taking the expected next year's dividend and dividing it by the difference between the required rate of return and the expected growth rate of dividends. Therefore, choice A is the correct answer as it represents the underlying assumption of the model.

The Underlying Assumption of the Dividend Growth Model Is That