Question

Gordon's Model of dividend relevance is same as __________________.

• A. No-growth Model of equity valuation
• B. Constant growth Model of equity valuation
• C. Price-Earning Ratio
• D. Inverse of Price Earnings Ratio

Answer 1

The correct option is B Constant growth Model of equity valuation

Gordon's Theory on Dividend Policy. Gordon's theory on dividend policy is one of the theories believing in the 'relevance of dividends' concept. It is also called as 'Bird-in-the-hand' theory that states that the current dividends are important in determining the value of the firm.

The Gordon Growth Model is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate.

Because the model assumes a constant growth rate, it is generally only used for companies with stable growth rates in dividends per share.