Gordon proposed a model of stock valuation using the dividend capitalization approach. His model is based on the following assumptions:
1. All-equity firm: The firm is an all-equity firm, and it has no debt
2. No external financing: Retained earnings would be used to finance any expansion.
3. Constant return: The internal rate of return, r, of the firm’s investment is constant.
4. Constant cost of capital: The appropriate discount rate k for the firm remains
constant and is greater than the growth rate.
5. No taxes: Corporate taxes do not exist.
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