[5 Points] In the context of the dividend growth model, is it true that the growth...
- [5 Points] In the context of the dividend growth model, is it true that the growth rate in dividends and the growth rate in the price of the stock are identical? All else constant, if the growth rate of dividends increase, what will happen to the price of the stock? Explain your answers.
Homework Answers
In the dividend growth model, the formula for stock price is
Price = D0*(1+g)/(k-g) , assuming dividends are growing at g rate perpetually, where D0 = Dividends just paid, k is the cost of equity.
Growth rate in dividends and price of stock are not identical as there is a denominator (k-g) which makes the price growth different from dividend growth rate.
If growth rate dividends of stock(g) increase, then the price of the stock would also increase as per the dividend growth model.
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[5 Points] In the context of the dividend
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