Question

The Required Rate of Return for common stock is Ke= (DyPO + g. what are the assumptions of the model?

a. All of these options are assumptions of the model.
b. Growth (g) is constant to infinity
c. The price earnings ratio stays the same.
d. The firm must pay a dividend to use this model.

Answer 1

a. All of these options are assumptions of the model

Step-by-step explanation:

Since D1 is the numerator, only dividend paying stocks can use this formula. It is perpetuity formula, so growth rate will continue to infinity. Since, stock price grow at constant rate, P/E Ratio will be the same.