Question

The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.A. TrueB. False

Answer 1

True

Step-by-step explanation:

The perpetuity formula used to determine the value of stock is:

stock value = dividend

interest rate

The discounted cash flow formula used to determine the value of a project or a revenue generating asset is:

present value = cash flow

discount rate

The cash flow is equivalent to the dividend, and the discount rate is equivalent to the interest rate.