The constant growth dividend model requires that ________.
A)the return rate r is greater than the growth rate g of the dividend stream
B)the return rate g is greater than the growth rate r of the dividend stream
C)the return rate r is lesser than the growth rate g of the dividend stream
D)we set g = 0 if the return rate r is greater than the growth rate g of the dividend stream

Question

Quizplus · Accepted Answer

The constant growth dividend model requires that the return rate r is greater than the growth rate g of the dividend stream, as this allows for the stock to have a positive present value. If the growth rate is greater than the return rate, the present value of the stock would become infinite, which is not plausible.

The Constant Growth Dividend Model Requires That ________