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.

Question

Business

Bear

21 October, 08:15

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.

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Answers (1)

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Leyla Sampson · Answer 1

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

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.