Answer:
c. requires the growth rate to be less than the required rate of return
Explanation:
The Dividend growth model was formulated by Myron Gordon.
The model helps in determination of market price of a stock ([tex]P_{0}[/tex] )
It is given by the following formula:
[tex]P_{0} = \frac{D_{0}(1\ +\ g) }{K_{e}\ -\ g }[/tex]
where [tex]P_{0}[/tex] = Current market price per share/stock
[tex]D_{0}[/tex] = Last paid dividend per share
g = annual growth rate in dividends denoted in percentage
[tex]K_{e}[/tex] = Cost Of Equity or Investor's required rate of return
The model assumes constant rate of growth in dividends. Another major shortcoming of the model being it's assumption of constant required rate of return of the investors.
One of the assumptions of Dividend Growth Model is,
Dividend Growth Rate < Required rate of return
