The Constant Growth Valuation Model Approach to Calculating the Cost

question 12

Multiple Choice

The constant growth valuation model approach to calculating the cost of equity assumes that

• A)earnings and dividends grow at a constant rate, but stock price growth is indeterminate
• B)the growth rate is greater than or equal to ke
• C)dividends are constant
• D)earnings, dividends, and stock price will grow at a constant rate

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Definitions:

Direct Labor

Work done by employees that can be directly traced to the production of goods or services, as opposed to indirect labor involved in support activities.

Direct Materials

The raw materials that are directly traceable to the manufacturing of a product and are an integral part of the finished product.

Depreciation

The systematic allocation of the cost of a tangible asset over its useful life, reflecting the asset's consumption or decline in value.

Period Cost

Expenses that are not directly tied to the production process and are expensed in the period in which they are incurred.