The underlying assumption of the dividend growth model is that a stock is worth:
A) the same amount to every investor regardless of their desired rate of return.
B) the present value of the future income which the stock generates.
C) an amount computed as the next annual dividend divided by the market rate of return.
D) the same amount as any other stock that pays the same current dividend and has the same required rate of return.
E) an amount computed as the next annual dividend divided by the required rate of return.

Question

Quizplus · Accepted Answer

The underlying assumption of the dividend growth model is that a stock's value is based on the present value of its future income, which is primarily derived from its dividends. The model assumes that dividends will continue to grow at a constant rate indefinitely and calculates the present value of these future dividends using the required rate of return. Therefore, option B is the correct choice.

The Underlying Assumption of the Dividend Growth Model Is That