What assumption does the Gordon-Growth Model rest upon?

The Gordon-Growth Model, also known as the Gordon-Shapiro Model, is a method used to determine the intrinsic value of a stock based on its expected future dividends that are assumed to grow at a constant rate. This model is particularly useful for valuing companies with stable growth patterns in their dividend payments.

The key assumption of the model is that cash flows, specifically in the form of dividends, will stabilize and grow at a constant rate over time. This means that once a company reaches maturity, the expectation is that it will generate a predictable pattern of cash flows that increases at a steady rate, making it easier to estimate the present value of those cash flows for the purpose of investment analysis.

By assuming constant growth, the model simplifies the valuation process and allows investors to forecast future dividends based on a fixed growth percentage. This helps in making investment decisions based on the expected return from dividends relative to the risk associated with the stock.

In contrast, other options reflect assumptions that introduce variability or do not align with the principles of the Gordon-Growth Model. While fluctuations and declines in cash flows, or focusing solely on operating income without considering stable dividend growth, are valid considerations, they do not conform to the foundational premise that underpins the Gordon-Growth Model's