An increase in which of the following will increase the current value of a stock according to the dividend growth model?
I.dividend amount
II.number of future dividends,provided the current number is less than infinite
III.discount rate
IV.dividend growth rate
A)I and II only
B)III and IV only
C)I, II, and III only
D)I, II, and IV only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

According to the dividend growth model, the current value of a stock is calculated using the formula: 
Current value of stock = (Dividend next year / (Discount rate - Dividend growth rate))
Therefore, an increase in dividend amount (I) and an increase in the number of future dividends (II) will directly increase the numerator of the formula, leading to an increase in the current value of the stock. An increase in the discount rate (III) would decrease the denominator of the formula, leading to a higher current value of the stock. An increase in the dividend growth rate (IV) would also increase the numerator of the formula, leading to a higher current value of the stock. Therefore, choices D (I, II, and IV only) is the best choice.

An Increase in Which of the Following Will Increase the Current