The dividend growth model considers capital gains but ignores the dividend yield. True False

Question:

The dividend growth model considers capital gains but ignores the dividend yield.

True

False

Dividend Growth Model:

The dividend growth model (DDM) is one of the financial methods to determine the value of common stocks. The DDM assumes that the business will last forever to secure an infinite series of dividends.

Answer and Explanation:

The answer is FALSE.

The DDM model does consider both capital gain yield and the dividend yield.

DDM Formula:

{eq}P_0 = \displaystyle\frac{D_1}{r_s - g} {/eq}

{eq}r_s = \displaystyle \frac{D_1}{P_0} + g {/eq}, where

{eq}\displaystyle\frac{D_1}{P_0} = Dividend\:Yield {/eq}

{eq}g = Capital\:Gain\:Yied{/eq}


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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