Question

In the constant growth (gordon) model, which of the following represents the capital gain

	a.	the dividend growth rate, g
	b.	the dividend just paid, D0
	c.	the required rate of return, r
	d.	the required rate of return less the dividend growth rate, r - g

Answer 1

In the constant growth gordon model among the all the listed options, correct option is A that the dividend gowth rate 'g' represnt the capital gain because in the formula calculated

V = D0(1+g)/(1+r)

In ths the (1+g) is the actual capital gain as if the dividend for the year is constant then the growth of the dividend is responsible for the express (1+g) which represent the capital gain for the years of invested.

While Option B is wrong because one for initial year or begining of first year if company pay the dividend when the investor has invested then there will be no capital gain.

While for option C the required rate of return is represent the time value of money rather than capital gain.

For doption D the required rate of return less the dividend growth rate represet again the large individual value to used the present value of money or time value of money instead of capital gain.