Western Governors University (WGU) BUS2040 D076 Finance Skills for Managers Practice Exam

The Gordon Growth Model, also known as the Dividend Discount Model (DDM), is employed to determine the intrinsic value of a common stock by considering the dividends it is expected to pay. This model assumes that dividends will increase at a constant rate indefinitely, allowing an investor to estimate the present value of these future cash flows. The formula for this model incorporates the expected dividends, growth rate of the dividends, and the required rate of return on equity.

Using this approach, the Gordon Growth Model provides a straightforward way for investors to assess the worth of a stock based on its ability to generate dividend income over time. This focus on dividends sets it apart from other valuation models that may consider different financial metrics or influences.

In contrast to the other options, the Capital Asset Pricing Model (CAPM) primarily calculates expected returns based on systematic risk and the market rate of return, rather than directly valuing stock on dividend performance. The Diversification Model pertains more to risk management and portfolio theory, addressing how to spread investment risk across various assets instead of valuing individual stocks. The Pricing Model is a more general term that may refer to various methods for estimating the price of assets and does not specifically address stock valuation through dividends.

The Gordon Growth Model is particularly favored