Question

The mixed growth dividend discount model of share valuation allows for the fact that

Select one:

a. companies typically go through life cycles.

b. all these answers are correct.

c. some companies do not pay any dividends.

d. some companies will fail and go into liquidation.

Answer 1

Companies typically go through life cycles. (which is Option A)

____

Explanation:

A company may pay different dividends at different points of time as it goes through life cycles. In the initial years, the company may experience may supernormal growth in its earnings. In such years, it may not pay dividends at all and may decide to retain all of its earnings for undertaking expansion/growth projects. Once the earnings of the company get stabilized (over a period of time), it may decide to pay dividends on a regular basis. As a consequence, It can be concluded that for many companies a constant rate of dividend may not be possible and the company may need to revisit its dividend policy from time to time. Therefore, Option A is correct.