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lord [1]
3 years ago
11

Using the dividend growth model, explain why a firm would be hesitant to reduce the growth rate of its dividends.

Business
1 answer:
Anna007 [38]3 years ago
4 0

Answer:

If a firm decreases its sustainable growth rate (g), the price of their stock will probably decrease. I will use the following example:

P₀ = Div₁ / (Re - g)

  • Div₁ = $2
  • Re = 12%
  • g = 5%

P₀ = $2 / (12% - 5%) = $28.57

if the growth rate g decreases to 2%, and the rest remains unchanged, then

P₀ = $2 / (12% - 2%) = $20

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