The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?
I.Firms that have a 100 percent retention ratio
II.Firms that pay an unchanging dividend
III.Firms that pay a constantly increasing dividend
IV.Firms that pay an erratically growing dividend
A) I and II only
B) I and IV only
C) II and III only
D) I, II, and III only
E) I, III, and IV only
F) None of the above.

Question

Quizplus · Accepted Answer

The dividend growth model can only be used for firms that pay a constantly increasing dividend (III) or firms that pay an unchanging dividend (II), which are the assumptions of the model. Therefore, choices I and IV are not applicable. Thus, choice C, which includes II and III, is the correct answer.

The Dividend Growth Model Can Be Used to Compute the Cost