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.

---

Definitions:

Futures Contract

A binding contract to trade a certain commodity or financial asset at a fixed price, with the transaction set to occur on a specified date in the future.

Debt Securities

Financial instruments representing money borrowed that must be repaid, with terms defining the interest rate and maturity date.

Equity Securities

Financial instruments that represent ownership in a company, such as stocks, granting holders a claim on the company's assets and earnings.

Financial Assets

Assets that derive value because of a contractual claim, such as stocks, bonds, bank deposits, and other investments.