Which one of the following is correct concerning the two-stage dividend growth model?
A) The discount rate is based on the coupon rate a firm pays on its outstanding bonds.
B) The first growth rate must be higher than the second growth rate.
C) The time value of money is ignored.
D) The discount rate ignores the risks associated with an individual firm.
E) The discount rate considers the risk-free rate of return.

Question

Quizplus · Accepted Answer

The discount rate in the two-stage dividend growth model considers the risk-free rate of return. The first growth rate can be either higher or lower than the second growth rate, depending on the company's circumstances. The time value of money is considered by discounting future dividend payments back to their present value. The discount rate also considers the risks associated with an individual firm, such as its beta and cost of equity. The discount rate is not based on the coupon rate a firm pays on its outstanding bonds, as this rate is specific to debt financing rather than equity financing.

Which One of the Following Is Correct Concerning the Two-Stage