Which one of these applies to the dividend growth model of stock valuation?
A)The dividend must be for the same time period as the stock price.
B)The growth rate must be less than the discount rate.
C)The rate of growth must be positive.
D)The model cannot be applied if the growth rate is zero.
E)The dividend amount must be constant over time.

Question

Quizplus · Accepted Answer

The dividend growth model assumes that dividends will grow at a constant rate indefinitely. For the model to work and not result in a negative stock price or other nonsensical outcomes, the growth rate of the dividends must be less than the discount rate. This ensures that the present value of future dividends is positive and finite.

Which One of These Applies to the Dividend Growth Model