The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

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BlackTom AI · Accepted Answer

The question asks about the two-stage dividend growth model and how it evaluates a stock's current price based on future dividends.
Option 1: 'pay an increasing dividend for a period of time and then cease paying dividends altogether.' This describes a scenario where dividends stop after a period, which contradicts the idea of a perpetual value derived from future dividends in a dividend-growth model. The model assumes ongoing dividends, not termination.
Option 2: 'increase the dividend amount every other year.' This is inconsistent with the standard two-stage model, which uses a first stage with a stable growth rate and a second stage with a different growth rate that continues indefinitely, not irregular or alternating increases.
Option 3: 'pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year.' This option imposes a quarterly pattern that does not align with the typical annual or continuous growth framework of dividend models. It introduces a cyclical timing that is not part of the canonical two-stage growth concept.
Option 4: 'grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.' This matches the core idea of the two-stage dividend growth model: an initial phase with one growth rate (the first stage), followed by a perpetual second phase with a different growth rate (the second stage). It reflects a change in growth assumptions after a finite horizon, which is precisely what the model intends to capture.
Option 5: 'pay increasing dividends for a fixed period of time, cease paying dividends for a period of time, and then commence paying increasing dividends for an indefinite period of time.' While this describes multiple phases, it introduces a dividend cessation phase and an indefinite second phase with growth, which goes beyond the standard two-stage model that typically involves two growth rates with continuous dividends thereafter, not an intermediate cessation period.
In summary, the two-stage model is correctly represented by a transition from an initial growth phase to a different, perpetual growth phase, without cessation or irregular periodic patterns. Therefore, option 4 aligns with the established definition of the model, while the other options introduce elements (cessation, irregular timing, or a third phase) that are inconsistent with the standard two-stage dividend growth framework.

33:390:300:13 FINANCIAL MANAGEMENT Exam 2- Requires Respondus LockDown Browser

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

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33:390:300:13 FINANCIAL MANAGEMENT Exam 2- Requires Respondus LockDown Browser

The two-stage dividend growth model evaluates the current price of a stock based on the assumption a stock will:

View Explanation

Log in for full answers

Similar Questions

Company ABC’s ordinary shares are currently selling at​ $24.00 per share. The company is expected to pay a dividend of​ $1.92 per share, which is predicted to grow at ​ 4% per annum forever. What is the​ share's expected rate of​ return?

Company ABC’s ordinary shares are currently selling at​ $24.00 per share. The company is expected to pay a dividend of​ $1.92 per share, which is predicted to grow at ​ 4% per annum forever. What is the​ share's expected rate of​ return?

Is the following statement true or false? Déjà vu’ just paid a cash dividend of $0.20 per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady 8% per year. The share will be worth $2.70 in five years?[Fill in the blank]

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More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

Company ABC’s ordinary shares are currently selling at $24.00 per share. The company is expected to pay a dividend of $1.92 per share, which is predicted to grow at 4% per annum forever. What is the share's expected rate of return?

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