gordon growth model: easy one

CFA Level II
#1

Kwaza asks Khan to investigate the most appropriate models for valuing utility companies. She tells Khan about the following points mentioned in various research reports on the utilities sector.

  • Report 1: A resurgence in domestic manufacturing activity will generate long-term growth in earnings and dividends that exceeds the cost of equity.
  • Report 2: Share repurchases are expected to increase. The report expresses confidence in the forecasts regarding the magnitude and timing of these repurchases.
  • Report 3: The report forecasts earnings growth of 4.5%. The key growth drivers are increases in population and business creation associated with stable GDP growth of 2.75%.

Which sector report best describes a situation in which the Gordon growth model could be used to value utility stocks?

  1. Report 1
  2. Report 2
  3. Report 3

answer is B. I chose C. I was deliberating between b and c but I chose c because B didn’t mention any stable growth rate so I didnt choose it. Why is the answer B and not c?

#2

would anyone know?

#3

any ideas?

#4

Choice A and choice C both have growth rates that either exceed the cost of equity or exceed GDP growth. So for those reasons the growth is not sustainable or stable.

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#5

I did not properly read the question there. . thanks very much Drockk.