- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 41. Equity Valuation: Concepts and Basic Tools
- Subject 3. Present Value Models: The Dividend Discount Model
CFA Practice Question
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 (1+g) greater than the prior one.
II. the discount rate is greater than the growth rate.
III. the growth rate increases over time.
Correct Answer: I and II
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! |