Final answer:
Option 4, suggesting that the stock price grows at a constant rate of 5%, correctly represents the statement about constant dividend growth. This is in line with the concept that as dividends grow steadily, the stock price should increase at a similar growth rate under the Gordon Growth Model.
Step-by-step explanation:
The statement that for constant dividend growth, the price grows at a constant rate of dividend growth 'g' = 5% suggests that the stock price should increase at the rate of dividend growth if everything else remains constant. In the context of the Gordon Growth Model, the value of a stock is determined by its expected dividends, which grow at a constant rate. The idea is that the dividends provide a return through the dividend yield, and any increase in stock price provides a return through capital gains yield. When dividends grow at a constant rate, the price of the stock is expected to rise correspondingly, which implies that investors would see a rate of return that comes from both the dividends and the appreciation of the stock's price.
Looking at the options given, the one that correctly represents the statement in question is: Option 4) Stock price actually grows at a constant rate of 5%. This indicates that the expected growth in the stock price due to dividends is at a constant rate of 5%. This does not directly specify the expected return, which is a function of both the dividend yield plus the capital gains yield. While the Option 2) Required rate of return rs shows a calculation of expected returns, it is not explicitly linked to the constant dividend growth assumption.