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Basic Question 1 of 16

The Gordon Growth Model assumes that ______

I. each future dividend is (1+g) greater than the prior one.
II. the discount rate is greater than the growth rate.
III. the growth rate increases over time.
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User Contributed Comments 9

User Comment
danlan The growth rate is constant.
valeris AS far as I goes, I'd say the correct answer is 'dividend is g greater than previous'.
garethdav is this gordon's growth model?
TheHTrader I guess "(1+g)" implies the multiplier to get the next dividend.
Vikku You are right TheHTrader.
bundy Growth rate constant
thecfaguy Isn't answer choice II an assumption of the infinite period DDM ?
2014 Page number 282 for assumtions of Gorden Model: same words used in notes:

"The dividend growth rate is strictly less than required rate of return"

Second option is correct hence

Required rate of return is constant overtime
Dividend growth is forever, perpetual, never changes
edushyant II is correct assumption, coz if the discount rate (ke) is not greater than growth rate(gc) then model breaks down as denominator will be negative!
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Learning Outcome Statements

explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models

calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate

identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate

explain advantages and disadvantages of each category of valuation model

CFA® 2024 Level I Curriculum, Volume 3, Module 8.