Solution-Numerator and the denominator increase

Numerator and the denominator increase

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Reference no: EM131201685

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: EM131201685

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Numerator and the denominator increase

Reference no: EM131201685

Reference no: EM131201685

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