The dividend growth model equates a stock’s intrinsic value (theoretical price) to the discounted sum of...
The dividend growth model equates a stock’s intrinsic value (theoretical price) to the discounted sum of the constant growth dividend stream. The relationship between the dividend growth rate (g) and the discount rate (r) is very important. Which statement accurately describes that relationship?
Select one:
a. I When g equals zero percent then the stocks intrinsic value is equal to div/r.
b. II When g exceeds r then the stock’s intrinsic value is negative, meaning the stock is worthless
c. III The stock’s intrinsic value is a decreasing function of the dividend growth rate (g)
d. II and III are correct
e. I, II, and III are all correct
Homework Answers
Price = Dividend*(1+g) / (R-g)
When g equals zero percent then the stocks intrinsic value is equal to div/r.
When g exceeds r then the stock’s intrinsic value is negative, it doesn't mean that the stock is worthless.
So, Option B,C,D, and E cannot be the answer.
Hence, Option A is the answer.
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