Which of the following is not a component of the Gordon (or constant dividend growth rate)...
Which of the following is not a component of the Gordon (or
constant dividend growth rate) model for valuing stocks?
| next year’s expected dividend |
| a constant dividend growth rate |
| next year’s expected earnings |
| a discount rate that reflects the riskiness of the stock |
Homework Answers
Answer: The third option is correct.
Out of the given options, we do not need the next year’s expected
earnings to determine the stock value using Gordan model.
Formula used in the model is:
Stock value=(Dividend in year 1)/(1+discount rate)^1+(Dividend
in year 2)/(1+discount rate)^2+.......+(Dividend in year
n)/(1+discount rate)^n+(Dividend in year n)*(1+Constant growth
rate)/((1+discount rate)^n * (Discount rate- Constant growth
rate))
Here n is the time period
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