The constant growth DCF model used to evaluate the prices of common shares is essentially the same as the model used to find the price of perpetual preferred stock or any other perpetuity.

Question

Quizplus · Accepted Answer

The constant growth DCF model, also known as the Gordon Growth Model, is used to determine the intrinsic value of a stock by projecting future dividends and discounting them back to present value. This same model can also be used to determine the price of a perpetuity, such as perpetual preferred stock, which pays a fixed periodic payment indefinitely. Therefore, the statement is true - the model used for common shares is essentially the same as the model used for perpetuities.

The Constant Growth DCF Model Used to Evaluate the Prices