CFA Practice Question

There are 191 practice questions for this study session.

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.

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
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