Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions.

Question

Quizplus · Accepted Answer

The constant-growth model (also known as the Gordon Growth Model) assumes that dividends grow at a constant rate indefinitely. If the growth rate of dividends exceeds the required rate of return, the model suggests an infinite stock price, which is not practical or realistic, thus rendering the model invalid under those conditions.

Whenever the Constant-Growth Rate for Dividends Exceeds the Required Rate