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The dividend growth model assumes that dividends increase at a constant rate forever. True False

Question:

The dividend growth model assumes that dividends increase at a constant rate forever.

True

False

Required Rate of Return:

The required rate of return is the minimum return that an investor expects from his stock investment in a company. The required return, when the dividends are constant, is simply computed by dividing the constant annual dividend with the current stock price. A few of the models used to determine the required return include the capital asset pricing model, the dividend growth model, etc.

Answer and Explanation:


Answer: True.

Explanation:

The dividend growth model, also referred to as the constant growth model is used to value the stock price of a company today based on a few assumptions.

One of those assumptions is that the future dividends on the stock grow at a constant growth rate, g, to perpetuity.

The present value of these future dividends assumed to grow at a constant growth rate, discounted at the required rate or return less the constant growth rate, is the current stock price.


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
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