[amp_mcq option1=”No-growth Model of equity valuation” option2=”Constant growth Model of equity valuation” option3=”Price-Earning Ratio” option4=”Inverse of Price Earnings Ratio” correct=”option2″]<\/p>\n
The correct answer is: B. Constant growth Model of equity valuation.<\/p>\n
Gordon’s model of dividend relevance is a model that is used to value a stock based on the expected future dividends. The model assumes that the company will grow at a constant rate forever and that the dividend will grow at the same rate. The model can be written as:<\/p>\n
P = D1 \/ (r – g)<\/p>\n
where:<\/p>\n
P = the price of the stock
\nD1 = the expected dividend next year
\nr = the required rate of return
\ng = the growth rate of dividends<\/p>\n
The constant growth model is a special case of Gordon’s model where the growth rate is equal to zero. In this case, the model can be written as:<\/p>\n
P = D1 \/ r<\/p>\n
The constant growth model is a simple and easy-to-use model, but it has some limitations. One limitation is that it assumes that the company will grow at a constant rate forever. This is not realistic, as companies typically experience periods of growth and decline. Another limitation is that the model assumes that the dividend will grow at the same rate as the company. This is also not realistic, as dividends can be increased or decreased at the discretion of the board of directors.<\/p>\n
Despite its limitations, the constant growth model is a useful tool for valuing stocks. It can be used to get a rough estimate of the value of a stock, and it can be used to compare the values of different stocks.<\/p>\n
The other options are incorrect because:<\/p>\n
A. No-growth Model of equity valuation is a model that is used to value a stock based on the expected future dividends, assuming that the company will not grow at all.
\nC. Price-Earning Ratio is a measure of the price of a stock relative to its earnings. It is calculated by dividing the price of the stock by the earnings per share.
\nD. Inverse of Price Earnings Ratio is a measure of the earnings per share relative to the price of the stock. It is calculated by dividing the earnings per share by the price of the stock.<\/p>\n","protected":false},"excerpt":{"rendered":"
[amp_mcq option1=”No-growth Model of equity valuation” option2=”Constant growth Model of equity valuation” option3=”Price-Earning Ratio” option4=”Inverse of Price Earnings Ratio” correct=”option2″]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[945],"tags":[],"class_list":["post-48656","post","type-post","status-publish","format-standard","hentry","category-financial-management","no-featured-image-padding"],"yoast_head":"\n