Solution-Absence of market imperfections

Absence of market imperfections

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Reference no: EM131206350

Recall the dividend growth model: P0 = D1 / (RE - g). In the absence of market imperfections, such as taxes, transaction costs, and information asymmetry, it can be shown that an increase in the future dividend, D1, will reduce earnings retention and reinvestment. This will reduce the growth rate, g. Therefore, both the numerator and the denominator increase, and the net effect on P0 is zero.

Reference no: EM131206350

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Absence of market imperfections

Reference no: EM131206350

Reference no: EM131206350

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