The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:
A) pay an increasing dividend for a period of time and then cease paying dividends altogether.
B) increase the dividend amount every other year.
C) pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year.
D) grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
E) pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.

Question

Quizplus · Accepted Answer

The two-stage dividend growth model assumes that a stock will grow at a fixed rate for a period of time, after which it will grow at a different rate indefinitely. This model is useful for evaluating the current price of a stock based on its expected future dividends. The other options are not consistent with the assumptions of the two-stage dividend growth model.

The Two-Stage Dividend Growth Model Evaluates the Current Price of a Stock