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True or False: Based on the dividend growth model, the value of common stock decreases with...

True or False: Based on the dividend growth model, the value of common stock decreases with growth rate of dividends.
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Answer #1

False.

According to the dividend growth model, the value of the stock which has a constant growth is given by .

Here, is the dividend,

'g' is the growth rate of the dividend

'r' is the required rate of return.

Here, we observe that as 'g' increase the numerator term increases and also, the denominator decreases. Hence, the value of the common stock increases as the growth rate of dividends increases.

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