Asked by Victoria Archie on Jun 27, 2024
Verified
Which one of the following statements concerning the dividend growth model is correct?
A) One of the advantages is that it applies to all dividend paying stocks.
B) The estimated cost of equity financing is very dependent upon the assumed rate of growth.
C) The estimated cost of equity will be directly affected by changes in the risk-free rate of return.
D) The risk level of the use of the funds will be directly considered by the model.
E) The main problem with the model is that it is so simplistic.
Dividend Growth Model
A valuation method used to estimate the price of a company's stock by assuming that dividends grow at a constant rate in perpetuity.
Rate of Growth
The percentage increase in the size or value of something over a specific period.
Risk-free Rate
The theoretical rate of return on an investment with zero risk, typically represented by the yield on government bonds.
- Understand the techniques for calculating the cost of equity capital.
- Determine the constraints and uses of various models for calculating the cost of capital.
Verified Answer
OG
Oopeve GosoljitJun 29, 2024
Final Answer :
B
Explanation :
The dividend growth model's estimate of the cost of equity financing is highly sensitive to the assumed growth rate of dividends. This is because the model directly incorporates the growth rate into its calculation, affecting the outcome significantly.
Learning Objectives
- Understand the techniques for calculating the cost of equity capital.
- Determine the constraints and uses of various models for calculating the cost of capital.