Which one of the following is an underlying assumption of the dividend growth model?
A)A stock has the same value to every investor.
B)A stock's value is equal to the discounted present value of the future cash flows which it generates.
C)A stock's value changes in direct relation to the required return.
D)Stocks that pay the same annual dividend have equal market values.
E)The dividend growth rate is inversely related to a stock's market price.

Question

Quizplus · Accepted Answer

The underlying assumption of the dividend growth model is that a stock's value is equal to the discounted present value of the future cash flows which it generates. This model assumes that dividends will continue to grow at a constant rate, which means that the expected future dividends can be calculated and discounted to determine the stock's present value.

Which One of the Following Is an Underlying Assumption of the Dividend