The constant growth dividend model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

Question

Quizplus · Accepted Answer

Both the constant growth dividend model and the model used to find the price of perpetuities are based on the assumption of constant cash flows that continue indefinitely. In both models, a discount rate is applied to these cash flows to determine the present value and thus the price of the stock or perpetuity.

The Constant Growth Dividend Model Used to Evaluate the Prices