Solution-Absence of market imperfections

Absence of market imperfections

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Reference no: EM131200487

Recall the dividend growth model: P₀ = D₁ / (R_E - 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: EM131200487

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Absence of market imperfections

Reference no: EM131200487

Reference no: EM131200487

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