The constant perpetual growth model is applicable to those firms which:
A)adhere to a residual dividend policy.
B)pay dividends that increase at a steady rate.
C)have irregular dividend growth rates.
D)maintain a constant dividend payout ratio.
E)have multiple rates of dividend growth.

Question

Quizplus · Accepted Answer

The constant perpetual growth model assumes that dividends are growing at a constant rate indefinitely. Therefore, it is only applicable to firms that pay dividends that increase at a steady rate. Option A is incorrect because the residual dividend policy determines the dividend amount based on the leftover or residual earnings. Option C is incorrect because irregular dividend growth rates do not fit the assumption of a constant growth rate. Option D is incorrect because maintaining a constant dividend payout ratio does not necessarily mean a constant rate of dividend growth, and option E is incorrect because the model assumes a single constant rate of growth.

The Constant Perpetual Growth Model Is Applicable to Those Firms