Which of the statements below is TRUE?
A)A problem with using the dividend growth model is that it appears to underestimate the expected return for all stocks.
B)A problem with using the dividend growth model is that it produces a negative expected return whenever a firm cuts dividends.
C)A problem with using the dividend growth model is that it produces a positive expected return whenever a firm cuts dividends.
D)A problem with using the dividend growth model is that it produces a negative expected return whenever a firm increases its dividends.

Question

Quizplus · Accepted Answer

The dividend growth model assumes that dividends will continue to grow at a constant rate, so if a firm cuts dividends, the model will produce a negative expected return as the growth rate for dividends will be negative. This is a limitation of the model.

Which of the Statements Below Is TRUE