The correct answer is: A. greater than dividend paid.
The constant growth model is a simplified method of valuing a stock that assumes that the company’s dividend will grow at a constant rate in perpetuity. This model is often used when a company has a long history of stable dividends and is expected to continue to grow at a moderate rate.
However, the constant growth model can be inaccurate if the company’s dividend growth rate is not constant. For example, if the company’s dividend growth rate is greater than the dividend paid, then the model will overestimate the value of the stock. This is because the model assumes that the company’s dividend will continue to grow at a constant rate, even though it is already growing at a higher rate than the dividend paid.
Therefore, the constant growth model should not be used in a situation where the company’s dividend growth rate is greater than the dividend paid.
Here is a brief explanation of each option:
- Option A: greater than dividend paid. This is the correct answer. As explained above, the constant growth model will overestimate the value of the stock if the company’s dividend growth rate is greater than the dividend paid.
- Option B: equal to realized rate of return. This is not the correct answer. The constant growth model can be used to estimate the value of a stock even if the company’s dividend growth rate is equal to the realized rate of return.
- Option C: less than realized rate of return. This is not the correct answer. The constant growth model can be used to estimate the value of a stock even if the company’s dividend growth rate is less than the realized rate of return.
- Option D: greater than realized rate of return. This is not the correct answer. As explained above, the constant growth model will overestimate the value of the stock if the company’s dividend growth rate is greater than the dividend paid.