The question asks which of the statements about the dividend constant-growth model are correct. The statements are: I. Assumes that dividends increase at a constant rate forever. II. Can be used to compute a stock price at any point in time. III. Can be used to value zero-growth stocks. IV. Requires the growth rate to be less than the required return.

1. Problem Description

The question asks which of the statements about the dividend constant-growth model are correct. The statements are:

I. Assumes that dividends increase at a constant rate forever.

II. Can be used to compute a stock price at any point in time.

III. Can be used to value zero-growth stocks.

IV. Requires the growth rate to be less than the required return.

2. Solution Steps

The dividend constant-growth model, also known as 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. The formula is:

$P_0 = \frac{D_1}{r - g}$

where:

$P_0$ is the current stock price,

$D_1$ is the expected dividend per share one year from now,

$r$ is the required rate of return for equity investors, and

$g$ is the constant growth rate of dividends, forever.

Statement I: The model explicitly assumes that dividends increase at a constant rate forever. So, statement I is correct.

Statement II: The formula computes the present value of all future dividends. It can be used to determine the stock price at the present time (time 0). It isn't directly used to compute a stock price at any point in time (e.g., time 1, 2, etc.). So statement II is incorrect.

Statement III: A zero-growth stock implies $g=0$. If we set $g=0$ in the formula, we have $P_0 = \frac{D_1}{r}$, which is valid. Therefore, the constant growth model can be used to value zero-growth stocks. So, statement III is correct.

Statement IV: The formula is valid only when $r > g$. If $g \ge r$, the denominator becomes zero or negative, resulting in an undefined or negative stock price, which is not economically meaningful. So, statement IV is correct.

Since statements I, III, and IV are correct, the answer is c.

3. Final Answer

c. I, III, and IV only