Final answer:
The constant dividend growth model is used to determine the intrinsic value of a stock based on its dividends. If the market price of a stock goes up, it means the market values the stock higher, possibly due to positive company performance or increased investor confidence. Changes in market price do not directly affect the dividend growth rate or intrinsic value of the stock.
Step-by-step explanation:
The constant dividend growth model for common stock is used to determine the intrinsic value of a stock based on the dividends it pays out. The formula for the constant dividend growth model is P₀ = D₁ / (r - g), where P₀ is the current price of the stock, D₁ is the expected dividend per share one year from now, r is the required rate of return, and g is the constant rate of dividend growth.
If the market price of a stock (P₀) goes up, it means that the market now values the stock higher than before. This could be due to several factors, such as positive company performance, increased investor confidence, or a favorable market environment. As a result, the stock's required rate of return (r) may decrease, assuming the dividend growth rate (g) remains constant. This is because investors are willing to accept a lower rate of return for an asset they perceive as more valuable. However, it's important to note that changes in market price do not directly affect the dividend growth rate or the intrinsic value of the stock.