Which of the following are the assumptions of Gordon's dividend-capitalization model? A. No taxes B.…
Myron J. Gordon's dividend-capitalisation (growth) model is based on the assumptions that (A) there are no corporate taxes, (D) the firm maintains a constant retention ratio…
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Which of the following are the assumptions of Gordon's dividend-capitalization model?
A. No taxes
B. Cost of capital is less than the growth rate
C. No internal financing
D. Constant retention
E. Constant cost of capital
Answer and explanation
Correct answer D
Myron J. Gordon's dividend-capitalisation (growth) model is based on the assumptions that (A) there are no corporate taxes, (D) the firm maintains a constant retention ratio (b), and (E) the cost of capital (k) remains constant and is strictly greater than the growth rate (k > br = g), with all investment financed solely through retained earnings (internal financing), i.e., A, D & E only.
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UGC NET Commerce