Question

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

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

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

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

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

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

** PLEASE PROVIDE ANSWER QUICKLY!**

Answer 1

Option	Correct / Incorrect	Reason
a	Correct	Expected dividend yield = Expected Dividend / Current Market Price
b	Correct	Constant growth models assumes that all the components grows at constant rate.
c	Correct	If growth rate is 0 then model assumes zero growth valuation model
d	Incorrect	If the required rate of return is less than the growth rate of dividends per share, the result is a negative value, rendering the model worthless. Also, if the required rate of return is the same as the growth rate, the value per share approaches infinity.
e	Correct	Cashflow grows at constant rate for infinite time as per constant growth model.

The right option is Option D.

Hope you understand the solution.