Asked by Meagan Silver on Jun 28, 2024
Verified
The underlying assumption of the dividend growth model is that a stock is worth:
A) The same amount to every investor regardless of their desired rate of return.
B) The present value of the future income which the stock generates.
C) An amount computed as the next annual dividend divided by the market rate of return.
D) The same amount as any other stock that pays the same current dividend and has the same required rate of return.
E) An amount computed as the next annual dividend divided by the required rate of return.
Dividend Growth Model
A valuation method that forecasts the price of a stock by using predicted dividends and discounting them back to present value.
Stock
Portions of equity in a company that signify an ownership interest and a right to its assets and profits.
Present Value
The monetary worth at present of a future sequence of payments or a single amount, calculated with a specific interest rate.
- Understand the correlation between share values, dividend payouts, and necessary returns.
Verified Answer
NS
Naimah SlaughterJun 30, 2024
Final Answer :
B
Explanation :
The dividend growth model (DGM) posits that the value of a stock is equal to the present value of all future dividends it is expected to provide. This approach fundamentally views a stock's worth as the sum of its future income streams, discounted back to their present value.
Learning Objectives
- Understand the correlation between share values, dividend payouts, and necessary returns.