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Basic Question 1 of 12
The Gordon growth model assumes that:
II. the discount rate is greater than the growth rate.
III. the growth rate increases over time.
I. each future dividend is greater than the prior one.
II. the discount rate is greater than the growth rate.
III. the growth rate increases over time.
User Contributed Comments 4
| User | Comment |
|---|---|
| noonah | I is correct because the model assumes a constant growth rate of dividends, and that means each dvd is greater than the prior one. |
| rhardin | I is NOT correct. Direct quote from the notes: "Dividends may fall at a constant rate indefinitely extending in the future..." In this case the formula will still be valid and g will be negative. |
| VenkatB | good point rhardin.. |
| chris54321 | well done rhardin, you will definitely pass |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
calculate the value of a common stock using the Gordon growth model and explain the model's underlying assumptions;
calculate the value of non-callable fixed-rate perpetual preferred stock;
calculate and interpret the implied growth rate of dividends using the Gordon growth model and current stock price;
describe strengths and limitations of the Gordon growth model and justify its selection to value a company's common shares;
CFA® 2025 Level II Curriculum, Volume 3, Module 21.