Question

What is the name given to the model that computes the present value of a stock by dividing next year's annual dividend amount by the difference between the discount rate and the rate of change in the annual dividend amount?

A. Stock pricing model
B. Equity pricing model
C. Capital gain model
D. Dividend growth model
E. Present value model

Answer 1

The answer is: D) Dividend growth model

Step-by-step explanation:

The dividend growth model is a stock valuation model which calculates the fair market value of stock by assuming that the stock's dividends grow at a stable rate in perpetuity.

The dividend growth model determines if a stock is overpriced or underpriced, based on the assumption that the stock's expected dividends grow at a given value (g) forever, which is subtracted from the return rate (r).

Price = Dividend / ( r – g )