Final answer:
The correct answer to the formula P₃ = D_X/(R−g) is option A - the dividend is for period three, where 'X' in 'D_X' specifies the period number for the dividend being used in this stock valuation model.
Step-by-step explanation:
The correct answer to the formula P₃ = D_X/(R−g) is option A - the dividend is for period three, where 'X' in 'D_X' specifies the period number for the dividend being used in this stock valuation model. The formula P₃ = D_X/(R−g) is related to the valuation of stocks, specifically a form of the Gordon Growth Model which is utilized to determine the present value of a stock based on its future series of dividends that grow at a constant rate. In this context, 'P' represents the price of the stock, 'D' is the dividend, 'R' is the required rate of return, and 'g' is the growth rate of the dividends.
Given that the model assumes a perpetuity of dividends growing at a constant rate, 'D_X' would be the dividend at a specific period. In this case, the subscript X in 'D_X,' where X=3, indicates that it refers to the dividend for period three. To clarify, this means that the correct answer to the student's question would be option A - the dividend is for period three.