The stock valuation model that determines the current stock price by dividing the next annual...

Question:

The stock valuation model that determines the current stock price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.

a. zero growth

b. dividend growth

c. capital pricing

d. earnings capitalization

e. discounted dividend

Stock Valuation Method:

A standard stock valuation method is the discounted dividend model. The philosophy behind this method is that the value of any asset is determined by the present value of future cash flows generated by the asset, discounted at the risk-adjusted required rate of return.

Answer and Explanation:

The answer is b).

According to the dividend growth model, the price of a stock is given by:

  • price per share = next dividend / (required return - dividend growth rate)

Thus the currents stock price is equal to next dividend divided by the excess of the discount rate less the dividend growth rate.


Learn more about this topic:

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The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
10K

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