Question

The underlying assumption of the dividend growth model is that a stock is worth: Group of answer choices

Answer 1

Answer:

B

Explanation:

A. the same amount to every investor regardless of their desired rate of return.

B. the present value of the future income which the stock generates.

C. an amount computed as the next annual dividend divided by the market rate of return.

D. the same amount as any other stock that pays the same current dividendand has the same required rate of return.

the dividend models are used to determine the value of a stock. It is assumed that the value of the stock is equal to the present value of the cash flows or dividends of the stock

The intrinsic value of a stock can be calculated using various dividend models. some of dividend growth models include:

1. The Gordon constant growth dividend model

2. The two-stage dividend growth model

3. The H-model

4. The three-stage dividend growth model

For example, if the dividend of a share in year 1 and 2 is 50 respectively and the discount rate is 10, the present value of the firm =

50 / (1.1) + 50 / (1.1^2) = 86.78