Question

Which of the following statements is incorrect regarding the constant growth model?

Group of answer choices

If the dividend growth rate is zero, the constant growth model becomes a zero-growth valuation model.

The constant growth model can still be used if the required rate of return is less than the dividend growth rate.

Another name for the dividend to be received in one year divided by the current stock price is the expected dividend yield.

The constant growth model calculates the value of a cash flow that grows at a constant rate over a infinite time horizon.

The constant growth model assumes that earnings, dividends and stock prices are expected to grow at a constant rate.

Answer 1

FOr this model to work, required rate must be higher than dividend growth rate. If not, denominator would be negative, which would mean negative share price, which is not possible.

Correct statement is: The constant growth model can still be used if the required rate of return is less than the dividend growth rate.