Whenever the dividend growth rate exceeds the required rate of return, the constant-growth model provides invalid solutions.

Question

Quizplus · Accepted Answer

The constant-growth model assumes that the dividend growth rate is constant and sustainable into the future. If the dividend growth rate exceeds the required rate of return, the model implies that the stock will have infinite value, which is not possible. Therefore, the constant-growth model is not applicable in this scenario and provides invalid solutions.

Whenever the Dividend Growth Rate Exceeds the Required Rate of Return