Question

If you use the constant dividend growth model to value a stock, which of the following...

If you use the constant dividend growth model to value a stock, which of the following is certain to cause you to increase your estimate of the current value of the stock?

Question 9 options:

Increasing the required rate of return for the stock.

Increasing the estimate of the amount of next year's dividend.

Decreasing the firm's long run earnings growth rate.

Increasing the rate of inflation in the economy.

all of the above

none of the above
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Homework Answers

Answer #1

The value of share using the dividend discount model is computed as shown below:

= Next year dividend / (required rate of return - growth rate)

As can be seen if we increase the estimate of the amount of next year's dividend, it will result in increase the value of the stock.

Decreasing the required rate of return and increasing the firm's long run earnings growth rate will increase the value

Hence the correct answer is option of Increasing the estimate of the amount of next year's dividend.

Feel free to ask in case of any query relating to this question      

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