The constant dividend growth model:
I.assumes that dividends increase at a constant rate forever.
II.can be used to compute a stock price at any point in time.
III.states that the market price of a stock is only affected by the amount of the dividend.
IV.considers capital gains but ignores the dividend yield.

Question

Quizplus · Accepted Answer

The constant dividend growth model assumes that dividends will increase at a constant rate forever (I) and can be used to compute a stock price at any point in time (II), but it does not state that the market price of a stock is only affected by the amount of the dividend (III) and it does consider the dividend yield as it is used to compute the stock price (IV). Therefore, options III and IV are incorrect, and the correct answer is D, which includes options I and II.

The Constant Dividend Growth Model