Which one of the following sets of dividend payments best meets the definition of two-stage...

Question:

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage growth dividend model?

a. No dividends for three years, then increasing dividends forever.

b. $1 per share annual dividend for five years, then $1.25 annual dividends forever.

c. Decreasing dividends for six years and then one final liquidating dividend payment.

d. Dividends payments which increase by 2, 3, 4, and 5% respectively for four years followed by a constant dividend thereafter.

e. Dividend payments which increase by 10% for three years followed by dividends which increase by 4% annually thereafter.

two-stage growth model

The two-stage dividend discount model assumes that the dividend will have two stages of growth. Firstly the dividend will grow at a constant rate for a certain period than in the second stage, it will grow at a different rate for the remainder of the companies life.

Answer and Explanation:

a. No dividends for three years, then increasing dividends forever.

- No, it goes through 2 stages of growth

b. $1 per share annual dividend for five years, then $1.25 annual dividends forever.

- No, the growth is there within the 2 stages

c. Decreasing dividends for six years and then one final liquidating dividend payment.

- No, the dividend is always increasing

d. Dividends payments which increase by 2, 3, 4, and 5% respectively for four years followed by a constant dividend thereafter.

- No, the growth is in two parts

e. Dividend payments which increase by 10% for three years followed by dividends which increase by 4% annually thereafter.

- Yes


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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