The constant-growth dividend model will provide invalid solutions when:
A) the growth rate of the stock exceeds the required rate of return for the stock.
B) the growth rate of the stock is less than the required rate of return for the stock.
C) the growth rate of the stock is equal to the risk-free rate.
D) None of the above.

Question

Quizplus · Accepted Answer

The constant-growth dividend model assumes that the growth rate of the stock is less than the required rate of return for the stock. Therefore, if the growth rate of the stock exceeds the required rate of return for the stock, the model will provide invalid solutions. Option B and C are incorrect because they both fall within the assumption of the model. Option D is incorrect because it does not provide a valid answer.

The Constant-Growth Dividend Model Will Provide Invalid Solutions When