Question

According to Gordon Growth Model, if investors expect the future dividends of a company to decline by 1% and require a 4% return on quity, then the value of its stock must be lower than the current dividend payment.

Select one: A. True B. False

Answer 1

statement is FALSE -According to Gordon Growth Model, if investors expect the future dividends of a company to decline by 1% and require a 4% return on quity, then the value of its stock must be lower than the current dividend payment.

Exp = As per Dividend growth model or Gorden growth model price of stock today = expected dividend next year/ (required rate - growth rate).

If the growth rate is negative or decline by 1% it will have current price which will be higher than the current dividend payment. Therefore statement is FALSe.