Circumstances in which the constant growth valuation model-the Gordon model-for estimating the value of a share of stock should be used include
A) the lack of dividends.
B) a steady growth rate in dividends.
C) an erratic dividend stream.
D) declining dividends.

Question

Quizplus · Accepted Answer

The constant growth valuation model, also known as the Gordon model or dividend discount model, is used to value stocks that have a steady growth rate in dividends. It assumes that the stock's value is based on the present value of future dividends, discounted at a rate equal to the stock's required rate of return. The model is not appropriate for stocks with no dividends or erratic or declining dividends.

Circumstances in Which the Constant Growth Valuation Model-The Gordon Model-For