Question

In the Gordon Growth Model, the share price at the beginning of the second year can be computed as Select one:

a. D3 / (r - g)

b. D2 / (r - g)

c. D1 / (r - g)

d. None of these.

Answer 1

Gordon Growth model is a method of valuing stock of company. In this model price is determined as sum of future dividend discounted at (reuired rate of return as reduced by growth rate).

In this model it is assumed that growth rate is constant.

It is determined as,

Price current year= Dividend of next years /(required rate of return - growth rate)

Price at year 2 = Dividend year i.e. D3/(r-g)

Assuming dividend are paid at the beginning of next year.

So, option A is correct