Which of the following statements is FALSE? A. According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate. B. A firm can only pay out its earnings to investors or reinvest their earnings. C. Successful young firms often have high initial earnings growth rates. D. Estimating dividends, especially for the distant future, is difficult.

Question

Business

Belinda Ho

23 August, 10:24

Which of the following statements is FALSE? A. According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate. B. A firm can only pay out its earnings to investors or reinvest their earnings. C. Successful young firms often have high initial earnings growth rates. D. Estimating dividends, especially for the distant future, is difficult.

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Answers (1)

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Deangelo Dalton · Answer 1

A. According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus the grow rate.

This is the false statement.

Explanation:

The fair value of stock can be calculated using the dividend growth model. While calculating the value of the stock, the growth of the dividends should be considered either in a stable rate or at a different rate during the period at hand.

The dividend growth model is also known as a valuation model as it is used to achieve the value of the stock.

Equity cost is the cost that the firm owes to the equity investors to compensate the risk of their investment.