The constant dividend growth model: I. assumes that dividends increase at a constant rate forever.
II) can be used to compute a stock price at any point of time.
III) states that the market price of a stock is only affected by the amount of the dividend.
IV) considers capital gains but ignores the dividend yield.
A) I only
B) II only
C) III and IV only
D) I and II only
E) I, II, and III only

Question

Quizplus · Accepted Answer

The constant dividend growth model assumes that dividends increase at a constant rate forever and can be used to compute a stock price at any point of time. Therefore, options I and II are correct. However, option III is incorrect as the market price of a stock is affected by both the amount of the dividend and the expected future growth of the company. Option IV is also incorrect as the constant dividend growth model considers both capital gains and the dividend yield.

The Constant Dividend Growth Model: I