The constant growth valuation model the Gordon model is based on the premise that the value of a share of common stock is
A) the sum of the dividends and expected capital appreciation.
B) determined based on an industry standard P/E multiple.
C) determined by using a measure of relative risk called beta.
D) equal to the present value of all expected future dividends.

Question

Quizplus · Accepted Answer

The Gordon model assumes that the value of a share of common stock is equal to the present value of all expected future dividends, which reflects the time value of money. The model is based on the assumption that the investor's required rate of return is composed of two parts: the dividend yield and the expected dividend growth rate. By estimating these two variables, the model can be used to determine the fair value of a stock.

The Constant Growth Valuation Model the Gordon Model Is Based