CA Final · Advanced Financial Management · Security Analysis
Which statement about the constant growth dividend discount model is correct?
The model requires the required return to exceed the perpetual growth rate. Otherwise the denominator is zero or negative and the formula gives meaningless values. Higher growth raises value while a higher required return lowers it.
- AIt remains valid even when growth rate exceeds the required return
- BValue falls as the growth rate rises, holding other inputs constant
- CValue rises when the required return rises, holding other inputs constant
- DIt requires the required return to exceed the perpetual growth rateCorrect
Explanation
The formula D1/(ke - g) is meaningful only if ke > g; otherwise value is negative or infinite. Higher g raises value and higher ke lowers it, so the other statements are wrong.
Did you get it right without looking?
One question tells you little. A timed set on Security Analysis shows your real accuracy, how long you take and where you lose marks.
More Security Analysis questions
- Shares of Rudra Pharma trade at Rs 200. Analysts gather data over a 5-day window around an unexpected regulatory approval announced on day 0…
- Arvind Textiles Ltd expects an EPS of Rs 12 next year. It plans to retain 40% of earnings, and its return on equity is 15%. Using the consta…
- Which of the following best describes the top-down approach in fundamental analysis?
- Shares of Kaveri Pharma Ltd. trade at ₹500 in a market believed to be semi-strong form efficient. The company publicly announces a surprise …
- A fund manager observes that a share with a beta of 1.2 earned a return of 18% in a year. The risk-free rate was 7% and the market return wa…
- Tara Foods Ltd has a constant dividend payout of 50%, expected growth of 8% and cost of equity of 14%. The stock trades at Rs 90 with next-y…