Which model assumes that dividends will grow at a constant rate but less than the required return?

The Constant Growth Model, also known as the Gordon Growth Model, assumes that dividends will grow at a constant rate indefinitely. This model is predicated on the idea that the growth rate of dividends is less than the required rate of return on equity, which is essential for maintaining a stable valuation over time.

The relationship between the growth rate of dividends and the required return is crucial; if dividends are expected to grow at a rate that exceeds the required return, the model would yield an unrealistic or infinite valuation because investors expect to earn a return higher than what they are receiving. By setting the growth rate to be constant and less than the required return, the model ensures a sustainable growth scenario where future cash flows can be accurately discounted back to present value.

In contrast, other options such as the finite constant growth model or the discounted cash flow model do not specifically detail this infinite growth assumption at a rate less than the required return. The finite model implies a growth that eventually comes to an end and may lead to different valuation implications, while the discounted cash flow model focuses on cash flows rather than dividends. Overall, the Constant Growth Model encompasses the specific conditions of dividend growth necessary for its valuation methodology.