# When to use Gordon growth model

Hi.

I have a difficulty with the understanding the logic of the answer to the following question (it appears in the one of the topic tests)

An investor gathered the following data:

Par value of preferred stock offered with a 6% dividend rate \$100

Company’s sustainable growth rate 5%

Yield on comparable preferred stock issues 11.5%

Investor’s marginal tax rate 30%

The value of the company’s preferred stock is closest to: \$96.92, \$54.78 or \$52.17

The correct answer is \$52.17 = \$100×0.060/0.115.

But I do not understand why it would be incorrect to use Gordon growth model?

Thank you

You ARE using the Gordon growth model - it’s just that dividends on non-participating preferred are constant. The "g’ in the GGM is rate of change in dividends from year to year. In this case, that rate of change is zero.

So, the GGM becomes P(0) = D(1)/(r-g) = D(1)/(r-0) = D(1)/r = 6/0.115

Thank you very muh for explanation.

The sustainable growth rate of 5% bleared my eyes