The constant dividend growth model:
I.assumes that dividends increase at a constant rate forever.
II.can be used to compute a share price at any point of time.
III.states that the market price of a share is only affected by the amount of the dividend.
IV.considers capital gains but ignores the dividend yield.
A)I only.
B)II only.
C)III and IV only.
D)I and II only.
E)I, II, and III only.

Question

The constant dividend growth model: 
I.assumes that dividends increase at a constant rate forever.
II.can be used to compute a share price at any point of time.
III.states that the market price of a share is only affected by the amount of the dividend.
IV.considers capital gains but ignores the dividend yield.
A)I only.
B)II only.
C)III and IV only.
D)I and II only.
E)I, II, and III only.

Quizplus · Accepted Answer

The constant dividend growth model assumes that dividends increase at a constant rate forever and can be used to compute a share price at any point in time. It considers both capital gains (through the growth rate assumption) and dividend yield (through the initial dividend amount). However, it does not state that the market price of a share is only affected by the amount of the dividend, which is incorrect (Choice C).

The Constant Dividend Growth Model