Final answer:
The statement is false. In the constant growth model, the growth rate of dividends should be less than the discount rate to ensure a positive present value for future dividends. A growth rate exceeding the discount rate would be unrealistic and could cause a valuation error, not negative stock values.
Step-by-step explanation:
The statement that the constant growth model sometimes yields negative values for stocks when growth rates exceed the discount rate is false. In financial modeling and stock valuation, the constant growth model, also known as the Gordon Growth Model, assumes that a company's dividends will continue to grow at a constant rate indefinitely. This model calculates the present value of an infinite series of future dividends. When using this model, the growth rate of dividends should be less than the discount rate (required rate of return), as this ensures that the present value of future dividends is positive. If the growth rate were to exceed the discount rate, it would imply an unrealistic scenario where dividends grow faster than the rate at which future cash flows are discounted back to the present value, which does not align with the premises of a sustainable growth model and could lead to incorrect valuation conclusions. In actual practice, if an analyst inadvertently inserts a growth rate higher than the discount rate, this would result in a mathematical error leading to an absurdly high or even undefined stock value, rather than a negative value.