The Constant Dividend Growth Formula P0 = Div1/(r - G)

question 31

Multiple Choice

The constant dividend growth formula P0 = Div1/(r - g) assumes:
I. the dividends are growing at a constant rate g forever.
II. r > g
III. g is never negative.

• A) I only
• B) II only
• C) I and II only
• D) III only

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Definitions:

Cost of Debt

The effective interest rate a company pays on its debts, including bonds, loans, and lines of credit.

Lenders' Return

The profit or interest earned by lenders for providing funds to borrowers, reflecting the compensation for the risk of lending and the time value of money.

Equity Investment

A financial contribution into shares of a company, granting the investor ownership rights and potential profit shares.

WACC

The Weighted Average Cost of Capital, a calculation of a firm's capital cost that weighs each category of capital (equity, debt, etc.) proportionally.