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:

Straight Bonds

Conventional bonds that pay a fixed interest rate over their lifetime and return the principal at maturity, without any special features or options.

Implied Value

The estimated value of an asset or investment derived from models or market prices rather than direct measurement.

Annual Coupon

The annual interest payment paid to bondholders, usually expressed as a percentage of the bond's face value.

Convertible Issues

Financial instruments such as bonds or preferred stocks that can be converted into a predetermined number of common stocks.