Question

he constant dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point of time. III. states that the market price of a stock is only affected by the amount of the dividend. IV. considers capital gains but ignores the dividend yield.

Answer 1

The correct answer is letter "D": I and II only.

Step-by-step explanation:

The Constant Dividend Growth model, also known as the Gordon Growth Model (named after Myron J. Gordon), is used to calculate the intrinsic value of a stock at any given point in time, based on the stock's expected future dividends. Investors and analysts use it frequently to compare the expected stock value to the real market price. Analysts interpret the difference between the two prices as proof that the stock could be below market value or overvalued.

The Constant Dividend Growth model assumes that the dividends grow at a constant rate for undetermined periods of time.