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Answer: required return on equity is greater than its expected dividend growth rate.
The Gordon growth model (also known as the dividend discount model) requires that the required rate of return (r) be greater than the dividend growth rate (g). This is because if g ≥ r, the model would produce negative or infinite values, which are not economically meaningful. The model assumes constant perpetual growth, so it is not appropriate for companies with high or volatile growth patterns (option B) or companies growing faster than the economy (option A).
Author: LeetQuiz Editorial Team
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The Gordon growth model is most appropriate for valuing a company's stock when the company's:
A
earnings are expected to grow faster than the economy.
B
earnings are expected to include periods of very high or very low growth.
C
required return on equity is greater than its expected dividend growth rate.
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