Question

The dividend growth model: Multiple Choice can only be used if historical dividend information is available. is based solely on historical dividend information. applies only when a company is currently paying dividends. is only as reliable as the estimated rate of growth. considers the risk that future dividends may vary from their estimated values.

Answer 1

Answer: Is only as reliable as the estimated rate of growth.

Step-by-step explanation:

The Dividend Growth Model depends a lot of the growth rate to determine the price of equity.

The formula goes as follows,

P = D( 1 + g) / ( k - g)

P is the stock price

D is the current dividend

k is the required rate of return

g is the growth rate.

Notice how the growth rate is very influential in this equation and so if it is wrong, the model fails in predicting the price of the stock.