Coldwell is using a constant growth dividend discount model to forcast the value of a share of common stock. Inherent in Coldwell’s assumptions is the idea that :
a. Compounding growth is linear
b. Dividends will grow at a rate faster than the presumed discount rate
c. Stock price will grow at the same rate as the dividend
d. Stock price will grow at the same amount as the dividend
Answer:C
Choice “c” is correct. An underlying assumption of the constant growth model is the idea that the stock price will grow at the same rate as the dividend, thereby producing a constant growth rate.