The constant dividend growth formula P₀ = Div₁/(r - g) assumes:
i.that dividends grow at a constant rate g,forever; II) r > g; III) g is never negative

Question

The constant dividend growth formula P₀ = Div₁/(r - g)assumes: i.that dividends grow at a constant rate g,forever; II)r > g; III)g is never negative A)I only B)II only C)I and II only D)III only

Quizplus · Accepted Answer

The constant dividend growth formula assumes that dividends increase at a steady rate indefinitely (I), and that the required rate of return (r) is greater than this rate (II) for the formula to work. Additionally, it assumes that the growth rate (g) is not negative (III). Therefore, choices I and II must be true for the formula to be valid, while choice III is more of a technical assumption for mathematical purposes.

The Constant Dividend Growth Formula P0 = Div1/(r - G)assumes

The Constant Dividend Growth Formula P₀ = Div₁/(r - G)assumes