Which one of the following is the assumption of Gordon’s Model:a.Ke > gb.Retention ratio (b),once decide upon, is constantc.Firm is an all equity firmd.All of the above
Question
Which one of the following is the assumption of Gordon’s Model:a.Ke > gb.Retention ratio (b),once decide upon, is constantc.Firm is an all equity firmd.All of the above
Solution
d. All of the above
Explanation:
Gordon's Model, also known as Gordon's Growth Model or Dividend Discount Model, makes several assumptions:
a. Ke > g: This means that the cost of equity (Ke) is greater than the growth rate (g). This is necessary for the model to work because if the growth rate is higher than the cost of equity, the present value of the future dividends would be too high.
b. Retention ratio (b), once decided upon, is constant: The retention ratio is the proportion of net earnings that is retained in the business as opposed to being paid out as dividends. Gordon's Model assumes
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