Based on the dividend growth model, the price of a stock will remain constant if the dividend is cut, provided that the:
A) required return on the stock is proportionately increased.
B) growth rate in dividends remains constant.
C) reduction is offset by an increase in the growth rate.
D)growth rate is decreased by the percent decrease in the dividend.

Question

Quizplus · Accepted Answer

The dividend growth model (Gordon Growth Model) calculates the price of a stock by dividing the dividend per share by the difference between the required rate of return and the dividend growth rate. If the dividend is cut but the growth rate increases proportionately, the price of the stock remains constant because the expected future dividends, growing at a faster rate, compensate for the initial lower dividend.

Based on the Dividend Growth Model, the Price of a Stock