Asked by CHELSEY MYERS on May 16, 2024
Verified
In the dividend discount model, which of the following are not incorporated into the discount rate?
A) Real risk-free rate
B) Risk premium for stocks
C) Return on assets
D) Expected inflation rate
Discount Rate
The interest rate used to discount future cash flows to their present value, crucial in determining the value of investments.
Real Risk-free Rate
The theoretical return on an investment with zero risk, taking into account the effects of inflation, thus representing the true purchasing power of the investment return.
Expected Inflation
The anticipated rate at which the general level of prices for goods and services will rise over a period of time.
- Understand the components and applications of the Dividend Discount Model (DDM).
Verified Answer
JS
Joshua SanchezMay 22, 2024
Final Answer :
C
Explanation :
The discount rate in the dividend discount model incorporates the real risk-free rate, a risk premium for stocks, and the expected inflation rate, but not the return on assets. The return on assets is a measure of a company's profitability relative to its total assets and is not directly related to the discount rate used in this model.
Learning Objectives
- Understand the components and applications of the Dividend Discount Model (DDM).