Infinite Growth Is a Problem with the Dividend Discount Model

question 26

Multiple Choice

Infinite growth is a problem with the dividend discount model because:

• A)The expected stream of dividends is infinite
• B)At reasonably high discount rates,such as 12 percent,dividends received in the distant future (40 or 50 years from now)are worth very little today
• C)Dividend growth rates eventually become very small
• D)The statement is incorrect - infinite growth is not a problem with the dividend discount model because at reasonably high discount rates,such as 12 percent,dividends received in the distant future are worth very little today

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Definitions:

Dividend Payout Ratio

The fraction of net income a firm pays to its stockholders in dividends, expressed as a percentage of the company's total earnings.

Retention Ratio

The proportion of earnings kept back in a company to reinvest, rather than being paid out as dividends.

Sustainable Growth Rate

The maximum rate at which a company can grow its sales, earnings, and dividends without having to increase debt or equity financing.

Inventory Turnover

A ratio showing how many times a company has sold and replaced inventory over a given period.