Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model?
A)no dividends for 5 years, then increasing dividends forever
B)$1 per share annual dividend for 2 years, then $1.25 annual dividends forever
C)decreasing dividends for 6 years followed by one final liquidating dividend payment
D)dividends payments which increase by 2, 3, and 4 percent respectively for 3 years followed by a constant dividend thereafter
E)dividend payments which increase by 10 percent per year for 5 years followed by dividends which increase by 3 percent annually thereafter

Question

Quizplus · Accepted Answer

The two-stage growth model is characterized by a period of higher growth followed by a period of more stable growth. Option E fits this definition as it has a high growth rate of 10% for 5 years followed by a lower growth rate of 3% thereafter. The other options do not have two distinct stages of growth. Option A has no growth for 5 years and then a constant growth rate, Option B has an initial period of growth followed by a constant growth rate, Option C has decreasing dividends followed by liquidation, and Option D has a series of increasing growth rates followed by a constant growth rate.

Which One of the Following Sets of Dividend Payments Best