What assumption does the Gordon Growth Model make about a company's existence?

What assumption does the Gordon Growth Model make about a company's existence?

• A. The company will experience constant revenue growth
• B. The company exists indefinitely with constant dividend growth
• C. The company's stock value will increase indefinitely
• D. The company will maintain a steady number of shares

Answer: (B)

The Gordon Growth Model, also known as the Dividend Discount Model, fundamentally assumes that a company will exist indefinitely with constant dividend growth. This assumption reflects the idea that the company will not only continue to operate over an infinite time horizon but will also consistently increase its dividends at a stable growth rate. This is critical for the model, as it calculates the present value of an infinite series of future dividends that grow at a constant rate. Underpinning this model is the belief in the stability and predictability of the company’s future earnings and its ability to return value to shareholders through dividends. The assumption of an indefinite existence aligns with the model's focus on the long-term nature of investments, encouraging investors to consider the present value of expected future cash flows.

The Gordon Growth Model, also known as the Dividend Discount Model, fundamentally assumes that a company will exist indefinitely with constant dividend growth. This assumption reflects the idea that the company will not only continue to operate over an infinite time horizon but will also consistently increase its dividends at a stable growth rate. This is critical for the model, as it calculates the present value of an infinite series of future dividends that grow at a constant rate.

Underpinning this model is the belief in the stability and predictability of the company’s future earnings and its ability to return value to shareholders through dividends. The assumption of an indefinite existence aligns with the model's focus on the long-term nature of investments, encouraging investors to consider the present value of expected future cash flows.