What happens to the constant-growth value when g gets very close to r?
AIt approaches infinity
BIt approaches zero
CIt becomes the book value
DIt equals the dividend
Answer & Solution
Correct answer: A. It approaches infinity
The denominator r - g shrinks toward zero, so the computed price grows without bound and the model loses meaning.
Keep practising Bond Valuation
Browse all Bond Valuation questions for CA Final, or explore more Strategicfinancialmanagement topics.
Related questions
The price-yield relation of a bond is described as what?For a discount bond, how does YTM compare with current yield?On a bond sold at a clean quote, what does the buyer pay at settlement?After a coupon is paid, how does a bond's dirty price behave?A 6% par-100 bond pays on 1 Apr and 1 Oct. On 1 Jul clean price is 98.20. Under 30/360 theHow does the term-structure approach discount a bond's cash flows?In the DDM, the dividend growth rate serves as a proxy for what?Which preferred stock carries an embedded option to swap into another security?