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 19 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

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

The constant dividend growth model estimates the current value of the stock is equal to the present value of all the future dividends discounted at the required rate of return of the stock.

Hence, increasing the next year dividend estimate will increase the estimate of the current value of the stock.

Increasing the required rate or decreasing the firm's long run earnings growth rate will decrease the PV of the future dividends and hence is incorrect. Inflation does not play a factor as long as the future dividends estimates include the inflation estimation.

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