The dividend growth model can be used to compute a stock price at any point in time. True False

Question:

The dividend growth model can be used to compute a stock price at any point in time.

True

False

Dividend Growth Model

Dividend discount model is one of the approaches used to calculate the cost of equity capital. According to this model, the cost of equity is the discount rate that equates the present value of all dividends expected to be received in future with the current market price of a share.

Answer and Explanation:

Answer is True

Assuming that dividends are expected to grow at a uniform rate perpetually, the dividend growth model solves for the present value of expected future dividends for an indefinite period. The value ( or current price) of an equity share is the present value of dividends expected in future for an indefinite period.

The following equation.is used to calculate the intrinsic value or current market price of a share.

{eq}Po = \frac{D1} {Ke - g} {/eq}

where

Po is the current market price

D1 is the expected dividend a year hence

g is the growth rate in expected dividends

Ke is the rate of return required on the equity share


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
10K

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