- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 41. Equity Valuation: Concepts and Basic Tools
- Subject 2. Present Value Models: The Dividend Discount Model

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**CFA Practice Question**

The constant-growth dividend discount model will not produce a finite value if the dividend growth rate is ______.

B. above its market capitalization rate

C. below its historical average

A. above its historical average

B. above its market capitalization rate

C. below its historical average

Correct Answer: B

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**User Contributed Comments**
7

User |
Comment |
---|---|

cgeek |
k-g < 0 ? |

katybo |
above required rate |

haarlemmer |
Just checked the definition, market cap rate= RRR |

Indira |
in DDM g should always be lower than the required rate of return or market cap rate |

Khadria |
A. Historical Average = g (so it can't be correct) |

cong |
market capitalization is the same as the required return on equity. k-g needs to be positive. |

robbiecow |
Wiki: "Capitalization rate (or "cap rate") is the ratio between the net operating income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value." |