Question

Which of the following statements is true about the constant growth model?
A- the constant growth model can be used if a stock's expected constant growth rate is more than its required return
B- The constant growth model can be used if a stock's expected constant growth rateis less than its required return

Answer 1

Answer: The constant growth model can be used if a stock's expected constant growth rate is less than its required return.

Explanation:

The Constant Growth Model  is a stock valuation method.

It assumes that a company's dividends are increasing at a constant growth rate indefinitely.

Formula: Current price =  (Next dividend the company is to pay) ÷ (required rate of return for the company - expected growth rate in the dividend.

When expected constant < required return, then the constant growth model can be used.

Hence, the statement is true about the constant growth model :

The constant growth model can be used if a stock's expected constant growth rate is less than its required return.

Answer 2

If a stock's predicted constant growth rate is smaller than its needed return, the constant growth model can be utilized.

So, option B is correct.

Define constant growth model.

The constant growth model is used to calculate a stock's inherent value depending on a succession of dividends that increase at a constant pace in the future.

Dividends per share, the growth rate of dividends per share, as well as the rate of return are the three inputs inside the constant growth model.

If a stock's predicted constant growth rate is smaller than its needed return, the constant growth model can be utilized.

So, option B is correct.

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