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The Dividend-Discount Model of stock valuation: A) Is an application of the net present value formula....

The Dividend-Discount Model of stock valuation:

A) Is an application of the net present value formula.

B) Takes the net present value of expected dividends and add it to the future sale price of the stock.

C) Takes the net present value of the expected future price of the stock and add the annual dividend.

D) Takes the annual dividend, adds it to the expected future selling price and divides by the number of years to get the current price.
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Answer #1

Answer: Option A; Is an application of the net present value formula

The Dividend-Discount Model of stock valuation is a method to calculate the present value of the stock. It uses the predicted dividends and discounts them back to the present value. The stock value is assumed to be the sum of all the future dividend payments discounted back to their present value. Stock is valued based on the net present value of the future dividends and hence is an application of net present value formula. It is calculated as

Stock value = Dividend per share/ (Discount rate- Dividend growth rate)

When the value is higher than the current stock value the stock is considered undervalued.

Hence other options are wrong and the answer is option a; is an application of net present value formula.

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