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Which of the following statements is CORRECT? a
Which of the following statements is CORRECT?
a. The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.
b. The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.
c. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
e. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
Expert Solution
The correct statement is c). :- The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
When the growth rate is constant, we can use the dividend growth model to calculate the current stock price.
Current stock price (P0) = D1 / (Required return - Growth rate)
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