The constant-growth dividend model will provide invalid solutions when:
A) the growth rate of the share exceeds the required rate of return for the share.
B) the growth rate of the share is less than the required rate of return for the share.
C) the growth rate of the share equals the dividend yield for the share.
D) None of the above.

Question

Quizplus · Accepted Answer

The constant-growth dividend model assumes that the growth rate of the dividend is constant and will continue indefinitely. However, if the growth rate of the share exceeds the required rate of return for the share, then the model will provide invalid solutions. This is because the model assumes that the growth rate is sustainable, but in reality, it is not. Therefore, the best choice is A. B and C are incorrect as the model will provide valid solutions in these cases.

The Constant-Growth Dividend Model Will Provide Invalid Solutions When