Using the constant dividend growth model for common stock, if the market price of stock (P₀) goes up, A) the assumed cost goes up. B) the assumed cost goes down. C) the assumed cost remains unchanged. D) Further information is needed to answer the question.

Question

Quizplus · Accepted Answer

According to the constant dividend growth model, as the market price of the stock goes up, the expected rate of return (and thus the assumed cost) decreases. This is because the dividend yield (annual dividend divided by the current market price) decreases, but the expected capital gains yield (the assumed growth rate of the stock's price) remains the same. Therefore, the cost of equity capital (the rate of return required by investors) decreases.

Using the Constant Dividend Growth Model for Common Stock, If