Which of the following is a situation in which you would want to use the constant growth model approach for estimating the component cost of equity?
A) When the firm has a low beta
B) When the firm has multiple divisions
C) When the firm's stock is expected to experience constant dividend growth
D) When the firm has a high level of financial leverage

Question

Quizplus · Accepted Answer

The constant growth model approach is appropriate when the firm is expected to experience constant dividend growth. This approach is based on the assumption that the dividend per share will grow at a constant rate forever. Therefore, if a firm's stock is expected to experience constant dividend growth, it would be appropriate to use the constant growth model approach for estimating the component cost of equity. The other options listed do not require the use of the constant growth model approach.

Which of the Following Is a Situation in Which You