Question

The constant-growth dividend model will provide invalid solutions when

a. the growth rate of the stock exceeds the required rate of return for the stock.
b. the growth rate of the stock is less than the required rate of return for the stock.
c. the growth rate of the stock equals the required rate of return for the stock.
d. none of the above.

Answer 1

The constant-growth dividend model will provide invalid solutions when the growth rate of the stock exceeds the required rate of return for the stock.

The constant-growth dividend model is also known as the Gordon growth model. This model is used to help determine the intrinsic value of a stock based on how future dividends grow at a set rate. Intrinsic value is defined as the real value of a company or asset based on what the perception of the value is. Both intangible and tangible factors are accounted for when determining intrinsic value.