In the constant-growth model, the market return must be ____ the dividend growth rate in order for the formula price to be meaningful.

Question

Quizplus · Accepted Answer

The constant-growth model formula assumes that the market return is greater than the dividend growth rate. If the market return is less than the dividend growth rate, the formula will not be meaningful as it results in a negative value for the denominator, which is not possible. If the market return is equal to the dividend growth rate, the formula simplifies to just the dividend yield, which is not a very useful metric for valuation. Therefore, the market return must be greater than the dividend growth rate for the constant-growth model formula price to be meaningful.

In the Constant-Growth Model, the Market Return Must Be ____