- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 41. Equity Valuation: Concepts and Basic Tools
- Subject 2. Present Value Models: The Dividend Discount Model

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**CFA Practice Question**

The dividend discount model values a share of stock as the sum of all ______.

A. future cash flows adjusted for time value of money

B. expected future cash flows, where these cash flows are adjusted for risk and time value of money

C. expected future dividend payments

**Explanation:**The value of any asset is the present value of its expected future cash flows discounted at the appropriate rate of return.

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**User Contributed Comments**
9

User |
Comment |
---|---|

jxiong |
What about A? |

tony1973 |
A does not consider the risk factor. |

rockeR |
A is about DCF model. (Discounted Cash Flow) The correct choice is about DDM model. This is the difference. |

VBday |
Doesn't multiple-period DDM also value expected price at the end of the valuation period? Since this is being discounted, isn't it being considered a cash flow? |

virashe |
VBday, expected price is also a function of future expected dividends. Thus, DDM is simply value of all future dividends discounted at appropirate risk rate. |

o123 |
You adjust future cash flows for: 1. uncertainty (risk), and 2. time. |

Spawellian |
your required rate of return should contain the premium for risk, so if you discount it for TVM -AND- risk then you're double counting the risk component. So I think A is right |

Criticull |
You are not double counting...your risk premium is embedded in req'd return. You therefore adjust for risk with the req'd ROR, you do not add another component beyond it, which is not necessarily implied by the wording of the answers. |

yxten1 |
required rate of return from equity is essentially the risk factor in answer B |