The Two-Stage Dividend Growth Model Evaluates the Current Price of a Stock

question 116

Multiple Choice

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

• A) pay an increasing dividend for a period of time and then cease paying dividends altogether.
• B) increase the dividend amount every other year.
• C) pay a constant dividend for the first two quarters of each year and then increase the dividend the last two quarters of each year.
• D) grow at a fixed rate for a period of time after which it will grow at a different rate indefinitely.
• E) 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.

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Definitions:

Stockholders' Equity

The ownership interest of shareholders in the assets of a corporation, calculated as total assets minus total liabilities.

Accounts Payable

Amounts a company owes to suppliers or creditors for goods and services received but not yet paid for, recorded as a liability.

Supplies

Items that are used in the day-to-day operation of a business but do not directly relate to the goods or services sold.

Balance Sheet

A financial statement that provides a snapshot of what a company owns (assets), owes (liabilities), and the value of shareholders' equity at a specific point in time.