Which of the following correctly illustrates the infinite period dividend discount model?
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A. B. C. D. E. F.A
The infinite dividend discount model assumes can be used to value a common stock when dividends are expected to grow at a constant rate. The equation which characterizes the infinite period dividend discount model is as follows:
Value of common stock = D1 / (k - g)
Where: D1 = the dividend at t1, k = the required rate of return, and g = the assumed growth rate of dividends.
The equation illustrated in choice D is simply an algebraic rearrangement of this equation, solving for D1.