- CFA Exams
- CFA Exam: Level II 2021
- Study Session 10. Equity Valuation (2)
- Reading 27. Discounted Dividend Valuation
- Subject 3. The Gordon growth 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 greater than the prior one.

II. the discount rate is greater than the growth rate.

III. the growth rate increases over time.

Correct Answer: II

###
**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 |