Question

Which of the following statements is most correct?

Select one:

a. The constant growth model is often appropriate for companies that never pay dividend.

b. The constant growth model is often appropriate for mature companies with a stable history of growth.

c. Two firms with the same dividend and growth rate must also have the same stock price.

d. The constant growth model cannot be applied to companies that expect zero dividend growth rate.

e. The constant growth model is often appropriate for companies that the dividend growth rate is larger than its required rate of return on stock.

Answer 1

Correct answer is B)

Reason: constant growth model formula is p= D1/(k-g) where D1 is dividend for first year k is cost of equity and g is growth rate. So it is not applicable for firms with zero dividend policy

So it is appropriate for mature companies with a stable growth. As mature firms only pay stable dividends(so this is correct answer)

Firms with similar dividend and growth will not have equal price beacuse expected return may vary

It is also not applicable for companies having more growth than expected return