Which of the following statements is true about the general dividend valuation model?
A) It implies that the underlying value of a share of stock is determined by the market's expectations of the future dividends that the firm will generate.
B) It implies that the value of a firm's common stock can be determined only if the expected future dividends are infinite.
C) It implies that the value of a growth stock can be determined by forecasting the future price of the stock.
D) The model cannot be used to calculate the value of a common stock unless the dividends exceed the firm's expected growth rate.

Question

Quizplus · Accepted Answer

The general dividend valuation model implies that the underlying value of a share of stock is determined by the present value of all expected future dividends that the firm will generate. This means that the market's expectations of the future dividends play a vital role in determining the underlying value of a stock, making option A the correct choice. Option B is incorrect because the model does not require infinite future dividends for valuation. Option C is incorrect because the value of a growth stock cannot be determined solely by forecasting the future price of the stock. Option D is incorrect because the model does not require that dividends exceed the firm's expected growth rate for calculating the value of a common stock.

Which of the Following Statements Is True About the General