What can you say about the value of stock with constant dividend growth where the growth...
Homework Answers
The value of the stock using the constant dividend growth model is calculated using the following equation :-
where D = dividend paid
r = discount rate
g = growth rate of the dividend
When g approaches r, the price of the stock becomes larger and larger and when g = r , the price becomes infinity which is not possible. When the growth rate is greater than discount rate , the constant dividend growth model tells us that the price of the stock is negative.
However a negative stock price is not possible, hence from a practical point of view the growth rate of the dividend cannot be greater than the discount rate.
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