Question

The dividend discount valuation model equates the current stock price to:

Select one:

A. All future expected dividends

B. All future expected dividends discounted by the weighted average cost of capital

C. All future expected dividends discounted by the cost of equity capital

D. The current dividend divided by current earnings per share

Answer 1

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Correct Answer: Option C) All future expected dividends discounted by the cost of equity capital

Reasoning:

A) The Dividend Discount Model is a quantitative method of valuation of a company’s stock price based on the sum of all of the company’s future expected dividends discounted back to their present value. Therefore, the discounting of future dividends is a must. Therefore, Option A is correct.

B) The cost of equity capital is used to discount the future expected dividend and not the weighted average cost of capital. Therefore Option B is wrong.

C)The current dividend divided by current earnings per share is used to calculate dividend yield and not used for calculating current stock price.