The stock valuation model D₁/(R_c - g)requires R_c G.

Question

The stock valuation model D₁/(R_c - g)requires R_c > G.

Quizplus · Accepted Answer

The model D₁/(R_c - g) is the discounted cash flow (DCF) model which is based on the assumption that the present value of future cash flows is equal to the current market value of a stock. For the model to work, the required rate of return (R_c) must be greater than the growth rate (g) of the company. Otherwise, the equation will result in a negative present value of future cash flows, which is not possible. Therefore, R_c > g is a necessary condition for the DCF model to be valid.

The Stock Valuation Model D1/(Rc - G)requires Rc > G

The Stock Valuation Model D₁/(R_c - G)requires R_c > G