How can the Gordon Growth model help explain the major decline in stock indexes during 2007-2009?

Question

Quizplus · Accepted Answer

The Gordon Growth Model states that the price of a stock is equal to its expected dividend divided by the difference between the required rate of return and the expected dividend growth rate. During the 2007-2009 financial crisis, there was an increase in the required return on equities due to economic uncertainty and risk aversion amongst investors. Simultaneously, the expected growth rate of dividends declined as companies struggled financially. This resulted in the stock market decline and is consistent with the predictions of the Gordon Growth Model. Therefore, option A is the correct explanation for the major decline in stock indexes during that period.

How Can the Gordon Growth Model Help Explain the Major